Review_Final - Overview Questions About International Trade...

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Unformatted text preview: Overview Questions About International Trade COURSE REVIEW 1. Why do countries trade? What is the basis for trade, especially the product (commodity) composition? 2. What are the overall gains (or losses) from trade for each country? 3. What are the effects of trade on each country’s economic structure? Production, Consumption? 4. What are the effects of trade on the distribution of income within each country? Winners, Losers? 5. What happens when factors move? 1 5 Consumer Surplus Producer Surplus • In the diagram, the consumer surplus of consuming 10 units of apple is given by a • In the diagram, the producer surplus of selling 10 units of apple is a p p 25 12 12 a a b q 10 4 b 10 q 6 Industry Equilibrium 7 Industry Equilibrium with Free Trade Closed Economy (Small Open Economy) SCanada Supply Consumer surplus Gains from free trade ` PAutarky PAutarky `` PWorld Demand ` DCanada Producer surplus QDomestic QAutarky 8 Production QAutarky Imports QTotal 9 •1 International Market International Market (Small Economy) (Large Open Economy) Gains from free trade Gains Domestic Country Supply Rest of the World PWorld Supply Rest of the world PWorld Gains Rest of the World Demand for imports Demand for Imports Imports Imports 10 11 Key Points Key Points 1. Why do countries trade? What is the basis for trade, especially the product (commodity) composition? • • If the world price is lower than the autarky price, the home country becomes better off by importing If the world price is higher than the autarky price, the home country becomes better off by exporting 2. What are the overall gains (or losses) from trade for each country? • • • If the home country imports, producers lose and consumers gain If the home country exports, producers gain and consumers lose The gains exceed the losses 12 Key Points Chapter 3: Why Do Countries Trade? 3. What are the effects of trade on each country’s economic structure? Production, Consumption? • • Production falls if the country imports, rises if the country exports Consumption rises if the country imports, falls if the country exports 4. What are the effects of trade on the distribution of income within each country? Winners, Losers? • • 13 13 Next on the agenda (see Chs 4 & 5)! Also to come: why the world price might differ from why the country’s autarky price? 14 • Adam Smith Absolute productivity advantages • David Ricardo Relative productivity advantages • Heckscher-Ohlin Relative abundance in factors of production • Other theories 15 •2 Trade: Graphical Analysis Trade: Graphical Analysis Each country has 100 hours available W = Wheat (bushels of) C = Cloth (yards of) Each country has 100 hours available W = Wheat (bushels of) C = Cloth (yards of) Wheat Wheat United States 100 Wheat United States PUS = 2W/C 100 Rest of the World W = 62.5 – 0.625 C New price is 1.0 W = 50 – 2C; production opportunity set 62.5 W = 50 – 2C 50 50 At 0.625 B/C, U.S. can exchange 50 W for 80 C Clearly the U.S. benefits PUS = 2W/C Consumption opportunity set 25 80 PRoW = 0.625 W/C Cloth 25 50 100 Cloth Cloth 16 Trade: Graphical Analysis Consequences Of Trade Each country has 100 hours available W = Wheat (bushels of) C = Cloth (yards of) United States 100 100 17 • Arbitrage opportunities Traders in the U.S. can profit by selling domestic wheat in exchange of foreign cloth Traders in the rest of the world can profit by selling cloth in exchange of U.S. wheat Rest of the World 62.5 • Production specialization D 50 As a result of the arbitrage opportunities, the demand of U.S. wheat increases while the demand of cloths decreases B C A The opposite takes place in the rest of the world 25 Cloth 100 Cloth 100 The U.S. specializes in the production of wheat and the rest of the world in the production of cloth 18 20 Chapter 4: Increasing Marginal Costs Consequences Of Trade (concl) concl) • Equalization of prices To insure that the demands of wheat and cloth are equalized to the production possibilities of the two countries, the arbitrage opportunities must be eliminated This requires price equalization Y 100 67 The bowed-out productionpossibility frontier The slope at the tangency is the relative price for that combination of output • Consumption possibilities are increased Because the single equilibrium price must be between the pretrade prices, no country will be worse-off by trading X 100 21 22 •3 Increasing Marginal Costs and Preferences Fundamental Principle of Trade Each country has 100 hours available United States 100 For trade to take place, there must be some differences between countries • In a static framework, trade would take place if Wheat Wheat Rest of the World 100 Production technologies are different Factor endowments are different 67 50 Labor, Land, Capital, other(?) 25 Cloth 100 Cloth 100 Consumer tastes are different Marginal costs could be decreasing 23 Chapter 5: Implications of H-O • 24 Implications of H-O Factor prices will change Higher real return to the factor used intensively in the rising-price industry Lower real return to the factor used intensively in the falling-price industry What has become cheaper in RoW? RoW WHEAT What factor does wheat use intensively? LAND What happens to the rent for land? FALLS What happens to wages in RoW? RISE wheat RoW • There will be winners and losers The owners of the factor of production more intensively used in the expanding sector will gain In the U.S. land rents rise In the RoW labor wages rise The owners of the factor of production used more intensively in the contracting sector will lose C Paut In the U.S. labor wages fall In the RoW land rents fall Pw Cloth 25 Implications of H-O 26 Chapter 6 Overview • Factor prices will equalize Factors of production like capital and labor earn the same rate of returns in both countries Doesn’t require trade in the factors! Land rents were higher in RoW than the U.S. They fall in RoW & they rise in the U.S. Wages were lower in RoW than in the U.S. They rise in RoW & they fall in the U.S. • Why do developed countries trade with each other so much? • Why is there so much cross-trade in similar products? • H-O theory doesn’t have an answer for this • One answer is: Economies of Scale Economies Internal economies External economies This is known as the “Stolper-Samuelson theorem” 27 28 •4 Monopolistic Competitive Markets Before Opening to Trade Monopolistic Competitive Market After Opening to Trade 29 30 Chapter 7: Growth and Trade External Scale Economies • There are several distinctions to be made • Firms operate competitively. Their production costs depend on the size of the industry Balanced growth vs. Unbalanced growth Large vs. Small economy Price Demand in closed economy Demand in open economy Sum of individual firms’ costs for different industry sizes • Factor endowment growth means more output, so overall it is a good thing The distribution of income may change There may not be per capita growth Industry average cost reflecting external economies Quantity 32 The Rybczynski Theorem 33 The Rybczynski Theorem • Consider “unbalanced growth” Only one (of the 2) factor endowment increases • It also means that • The industry that uses that factor intensively will grow, the other industry will decline in both industries the return to the factor that grew falls the return to the factor that didn’t grow rises It means that some of the “other” factor will move to the growing industry 34 35 •5 Key Summary Points Immiserizing Growth • The Rybczynsky theorem says that if only one factor endowment (of two) grows • Two effects when a large economy grows Growth effect => tends to make economy better off ToT effect (Terms of Trade) if growth biased toward the import sector =>ToT improves if growth biased toward to export sector => ToT worsens If ToT worsens enough to overcome the growth effects => growth is immiserizing The industry that uses that factor expands, the other industry contracts • A small economy always benefits from growth It can’t change relative prices (ToT) • A large economy always benefits from growth if growth favors its import sector Reduces the price of the import • A large economy may be harmed by growth, if growth favors its export sector Reduces the price of the export 36 37 Equilibrium With Tariff Chapter 8: Equilibrium With a Tariff (Large Economy) (Small Economy) Sd B E Sd + SForeign A Tariff Price with tariff F B PFreeTrade G World price 300 C Dd F E C 1.0 1.12 G H Sd + SForeign Dd PWorld Price QDomestic 0.6 With Tariff D PWith Tariff D 360 Tariff Tariff (not to scale) Tariff revenue A Sd Tariff revenue from imports QTariff 1.6 Losses from tariff - = Losses from imposing the tariff 38 39 Main Conclusions -2 Main Conclusions -1 • A tariff almost always lowers world well-being This means someone loses more than others gain • A tariff usually lowers the well-being of each country, including the one that imposes the tariff! • Whatever a tariff can do for the country, there is, almost surely, another policy that can do it better 40 • There are exceptions to these rules: In the case of a “nationally optimal tariff” The tariff-imposing country may gain at the expense of other countries, under some conditions If there are incurable distortions, or international trade-specific distortions a tariff may be better than doing nothing or even the best policy • A tariff absolutely helps groups closely tied to the production of import-substitutes Even if that tariff is bad for the country as a whole 41 •6 Chapter 9 Overview Chapter 9 Overview • NTBs for sure Help producers that compete with the targeted imports Harm domestic consumers • The main issue that determines who benefits and who loses is who gets the implied tariff revenues For quotas there needs to be an allocation system Ditto for import allocations For VERs the allocation rights are handed to the foreign government • NTBs Probably hurt the importing nation as a whole Almost surely hurt the word as a whole 42 VERs • For the importing country, the welfare losses are larger as it loses the implied tariff revenue • For the exporting country, the welfare consequences could be positive or negative They get the implied tariff revenue! • It may lead to strategies of “quality upgrading” from the exporting country 43 Chapter 10: Free Trade Arguments • • • • Efficiency Scale economies Transfer of technology Reduction of social costs (e.g. rent-seeking cost) same quantity but higher value exported 44 Generic Protection Arguments -1 If any of these is a good thing, let’s do it with let’ tariffs or NTBs: NTBs: • Promote domestic production of the product Usually: increase labor employment in this domestic production Sometimes: decrease domestic consumption of product • • • • 45 Generic Protection Arguments -2 • National “pride” • National defense Eliminate distortions and externalities Protect an “infant” or a “dying” industry Increase government revenue Alter the distribution of income in the country 46 47 •7 Chapter 11: Pushing Exports Chapter 11: Pushing Exports • • Dumping Export subsidies Predatory Increasers home price of the product for the exporter Cyclical May end up subsidizing the importer Seasonal • Persistent • Countervailing duties Can be legal under WTO rules Could be a result of different market power in the exporting and importing countries World equilibrium can return to normal Importing country may gain 48 49 Chapter 12: Trade Bloc(k)s Chapter 11: Pushing Exports • • Trade blocs When there are declining marginal costs With declining MC, the location production may be a historic accident Free trade areas Customs unions Common markets Economic unions of Subsidies may create a viable industry But it may not! • Trade creation, Trade diversion • Trade blocks Trade embargoes 50 Chapter 12: Trade Bloc(k)s 51 The WTO and its Progenitor the GATT • • • • • NAFTA Customs Union • The EU Common Market Why a new world organization? The WTO The structure and role of the WTO GATT, GATS, TRIPS and other acronyms Challenges: the future The Doha round • Other 52 53 •8 Chapter 13: Trade and the Environment • Movements of goods and services are goods services politically pretty controversial • Is free-trade anti-environment? Rush to the lowest common denominator? WTO & environment protection? • Factor movements are much more controversial • Capital movements • Labor movements • MNEs • Economic size and pollution Total income, per capita income • • • • Chapter 15: Factor Movements Domestic pollution Transborder pollution Global pollution Labor Standards Agents of evil? 54 55 55 THE END 56 •9 ...
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