2.2 Trade Liberalization

2.2 Trade Liberalization - D uring the last decades of the...

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During the last decades of the 20th century, many countries have gone through a series of reforms labeled known as “trade liberalization”. Explain the typical policies involved, the costs, and the expected vs. actual results. - Why do countries trade? o Proximity Costs of transportation low o Resources Land, minerals, labor, capital Factor endowments/Factors of Production The Heckscher-Olin Model states that trade happens because countries have different resources Comparative advantage influenced by Relative factor abundance in countries and relative factor intensities need for the production of a good o Variety More choices, substitution Good because spurs innovation due to competition - Typical policies o liberal trade and investment policies: growth, innovation and competitiveness Decrease in trade barriers Tariffs, quotas Opening up capital markets Privatization o macroeconomics policies: promote stability and growth Exchange rate management o labor market policies: develop workers’ skills, facilitate labor mobility o institutional and governance framework: favor structural reform Rationalization of the tax system to make up for reduction of revenue from tariffs o efficient framework of regulation: fosters competition, ensures market openness Improvements in budget management and controls Improving financial sector - Costs of trade liberalization o Structural Adjustment costs rises in unemployment rates temporary declines in industrial output potential rise in political instability o Adjustment costs
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Resources are moved from one sector to another in the process of reform Affects the distribution of income among factors of production Relative price of scarce factor will decline while that of abundant factor will increase Reduces tariff revenues Cost of revenue loss is high as alternative sources of revenue are limited Have to change the structure of their taxation systems in order
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2.2 Trade Liberalization - D uring the last decades of the...

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