Chapter 6 MOS notes

Chapter 6 MOS notes - Chapter Six The Political Economy of...

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Chapter Six – The Political Economy of International Trade Free trade – the absence of barriers to that free flow of goods and services between countries The theories from Smith, Ricardo, and Heckscher-Ohlin show that free trade creates static economic gains (because free trade supports a higher level of domestic consumption and more efficient utilization of resource) and dynamic economic gains (because free trade stimulates economic growth and the creation of wealth) Government’s motive are to protect domestic producers and jobs from foreign competition while increasing the foreign market for products of domestic producers Instruments of Trade Policy Tariffs Tariff – a tax levied on imports; two categories: Specific Tariffs – tariff levied as a fixed charge for each unit of good imported Ad valorem tariffs – a tariff levied as a proportion of the value of an imported good Ex: EU and Latin American bananas Consequences from tariffs: 1. Unambiguously pro-producer and anti-consumer (they protect producers from foreign competitors, but this restriction of supply increases costs for consumers) 2. Tariffs reduce the overall efficiency of the world economy; create products that could be produced more efficiently abroad Subsidies Subsidy – government financial assistance to a domestic producer (usually agriculture) Many forms including: cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms Help domestic producers in two ways: help them compete against foreign imports and help them gain export markets Critique: protect inefficient producers from going out of business, encourage countries to overproduce, encourage countries to produce products that could be grown more cheaply/inefficient in other places, reduce international trade in agricultural products Import Quotas and Voluntary Export Restraints Import quota – a direct restriction on the quantity of a good that can be imported into a country; usually enforced by issuing import licenses to a group of individuals or firms Voluntary export restraint – a quota on trade imposed from the exporting country’s side, instead of the importer’s; usually imposed at the request of the
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This note was uploaded on 02/27/2011 for the course MOS 020 taught by Professor Hunter during the Spring '08 term at UWO.

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Chapter 6 MOS notes - Chapter Six The Political Economy of...

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