Review_Midterm 2_Ch7-12

Review_Midterm 2_Ch7-12 - REVIEW OF CHAPTERS 7 THROUGH 12...

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Unformatted text preview: REVIEW OF CHAPTERS 7 THROUGH 12 Chapter 7 Overview • • • • Is growth always good? What is the Rybczynski Theorem? What is the “Dutch Disease”? Under what circumstances is immiserizing growth more likely to occur? It is possible to grow and become poorer as a result 1 Growth and Trade (cnt) cnt) 6 The Rybczynski Theorem • Consider “unbalanced growth” • Distinctions to be made: Only one (of the 2) factor endowments increases Balanced growth vs. Unbalanced growth Large vs. Small economy • 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 • The industry that uses that factor intensively will grow, the other industry will decline It means that some of the “other” factor will move to the growing industry 7 The Rybczynski Theorem 8 Immiserizing Growth • Two effects when a large economy grows Growth effect => tends to make economy better off ToT effect (Terms of Trade) • It also means that the return to the factor that grew falls the return to the factor that didn’t grow rises in both industries 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 9 10 •1 Chapter 8 Overview Chapter 8 Overview (cnt) cnt) • A tariff is a tax on imports • What happens to terms of trade when a country imposes a tariff? Tariffs can be very large A small economy? A large economy? Sometimes they are called “customs duties” • Tariffs are referred to as “protection” because they raise prices of imports and lower competitive pressures on import-competing industries • What is the effective rate of protection? • What is the optimal tariff rate? 12 13 Equilibrium With Tariff Equilibrium With a Tariff (Small Economy) Sd D 360 B E World price C Dd PWith Tariff B Tariff F E C 1.0 1.12 G H Sd + SForeign Dd PWorld Price QDomestic 0.6 With Tariff D PFreeTrade G 300 Sd + SForeign A Price with tariff F Sd Tariff revenue from imports Tariff (not to scale) Tariff revenue A Tariff (Large Economy) QTariff 1.6 Losses from tariff - = Losses from imposing the tariff 14 15 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 16 • 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 17 •2 Chapter 9 Overview Chapter 9 Overview • NTBs for sure • NTB techniques: Help producers that compete with the targeted imports Harm domestic consumers Import quotas Voluntary Export Restraints (VERs) Discriminatory product standards Buy-at-home rules for government purchases Local content requirements Red tape to harass importers Import licensing • NTBs Probably hurt the importing nation as a whole Almost surely hurt the word as a whole 18 19 VERs (concl) concl) Chapter 9 Overview • 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 • 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 same quantity but higher value exported 20 21 Chapter 10 Overview Free Trade Arguments • What is a market failure? • What is the Coase Theorem? • What are the consequences of trade “protection”? • What are the implications for trade when markets fail? • What is an industrial policy? 22 • • • • Efficiency Scale economies Transfer of technology Reduction of social costs (e.g. rent-seeking cost) 23 •3 Generic Protection Arguments -1 Generic Protection Arguments -2 • Promote domestic production of the product Usually: increase labor employment in this domestic production Sometimes: decrease domestic consumption of product • • • • Eliminate distortions and externalities Protect an “infant” or a “dying” industry Increase government revenue Alter the distribution of income in the country • National “pride” • National defense If any of these is a good thing, let’s do it with let’ protection! 24 25 Chapter 11 Overview Chapter 11 Overview • • 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 26 Chapter 12 Overview Chapter 11 Overview • • Trade blocs When there are declining marginal costs With declining MC, the location production may be a historic accident 27 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 28 29 •4 Chapter 12 Overview The WTO • NAFTA • GATT and the WTO Customs Union Punta del Este • The EU • Principals of GATT and the WTO • GATTS, TRIPS, and other acronyms • The adjudication and enforcement mechanisms of the WTO Common Market 30 Assigned Articles 31 THE END • The Great Unbundling: Does Economics need a new theory of offshoring? • Globalization and the rise of inequality; Rich man, poor man • Trade talks: Mangling trade • Trade’s victims; In the shadow of prosperity 32 33 •5 ...
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