Econ 420 Final exam notes - Econ 420 Notes for Final...

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Econ 420 – Notes for Final Lecture 1 – 10/12/05 Wine Cloth *price of wine will have to decline *specialization is in wine in this situation Assume… two countries, same PPC If there are two countries with the same production possibilities curves, should they engage in trade?? not necessarily, it depends on their indifference curves *since the indifference curves determine the domestic exchange rates, that’ll determine if specialization will happen Assume… two countries , different PPCs
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Will trade always occur?? nope, b/c if they have equal domestic exchange rates, trade won’t happen Factor Price equalization (Heckscher-Ohlin theorem) *What determines specialization/trade is factors of production 1. Assumption that goods are mobile internationally, but factors of production are not. 2. Assume two countries: A & B a. In A, labor is more abundant than capital, L>K b. In B, capital is more abundant than labor, K>L 3. Two goods: X & Y c. X is labor intensive d. Y is capital intensive 4. Factor remuneration (remuneration = earnings) depends on the K/L ration (law of variable proportions) 5. Without trade, scarce factor has higher remuneration than abundant factor 6. With trade scarce factor’s remuneration declines & abundant factor’s remuneration increases * assume no migration of either capital or labor leads to equalization of earnings *this theory relates international trade to distribution of income Lecture 2 – 10/24/05 Tariffs 1. Export or import duties 2. Used to be the principal source of government revenue before the 20 th century a. Changed in 1920’s, more income taxing composed government revenue b. Today tariffs compose 1-2% of government revenue 3. Revenue vs. protective tariffs a. If a tariff is for revenue purposes, it can’t be protective 4. Specific vs. ad valorem tariffs a. Specific : a specific amount on item b. Valorem : 20% value of car, 20% of merchandise 5. Analysis of the ‘burden of a tariff’ on Graph A : For this country, the price can be raised, given the excess supply is exported Graph C : The price could be lowered and the excess demand could be satiated through imports
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Graph B : trade happens new equilibrium Price and Quantity for international economy Pt. A: tariff if there is a tariff, then price goes up to P l although qty remains the same, therefore now supply is greater than demand *How much of the burden falls on importer/exporter depends on the elasticity of the demand curve. *The more inelastic the demand curve, the more the burden falls on the importer vs. the exporter *Here the demand is gone when a tariff is implemented Consumer Surplus *All consumers to the left of Q o have a surplus *Producer surplus : difference between what the producer expects from the market and what he/she actually gets
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Welfare Tariff Analysis AB is imported *Price P l can be maintained if the excess demand is imported T: tariff with the addition of the tariff, importers go down to cd *so imports declined to fg What happened to consumer surplus as a result of the tariff??
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