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10b.+Trade+Policies+and+Instruments - Lecture 13...

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Lecture 13: Instruments of Trade Policy: Tariffs & Non-Tariff Barriers to Trade We’ve already seen how free trade is good for society overall and in the long-run. But we’ve also talked about how trade can be re-distributive within a society in the short-run; that is, how it can create winners and losers across an economy. And of course, both losers & winners often organize and fight politically to defend their interests. We then studied one way of modeling this behavior: Specific Factors (aka Ricardo-Viner) model. In this lecture, we’ll see that there’s more to it than that. Say the losers win their political fight, and the government goes protectionist. But what kind of protectionist policy should govt. pursue? Protectionism can take many different forms. And these different forms of protectionism also create different kinds of winners & losers. This lecture will explain these differences and what they might mean for politics (domestic and international). You’re probably not going to get this the first time round. But consult the slide and lecture notes at home, and it will make more and more sense. This lecture will cover: ●Tarrifs NTB’s [slide] ●Subsidies ●Quotas ●Voluntary Export Restraints ●Local Content Requirements ●export credits ●national procurement ●red tape/standards -Q: What are the sources of protectionism (Specific factors: mobile v. specific) Let’s start with some basic economics (take Econ 2106 if you’re interested in more): Supply v. Demand - [slide] here’s price & here’s quantity -draw me the supply curve [slide] -draw me the demand curve [slide] -and from these curves you get the quantity & price that the market provides [slide] [slide] Now let’s look at a world of just two countries [slide] HOME and foreign [slide] And this is a world without trade, and we know this because we have two distinct markets here -So let’s say that that supply & demand curves meet at a high price in Home. For whatever reason, productivity, weather, soil, relative abundance/scarcity. And in Foreign supply & demand meet at a low price. Now as separate markets, there are two prices for sugar, one for home and one for foreign. -Q: In this particular good, who has comparative advantage? And how do you know? -but if the markets are joined by trade, then we have one market: A world market, with one price for sugar, a world price. And that price is determined by world supply and demand. And as you can - 1 -
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probably guess, if there are only two countries, then world supply and demand will just be a combination of Home & Foreign supply…and Home & Foreign demand…which will be somewhere in the middle between the two. -Q: So who benefits from trade? (not just foreign! Everyone! HOME’s consumers benefit and everyone is a consumer. If its basic good or service, like food or automobiles…then the poor benefit proportionally more than the rich as a percentage of income) So what happens when we trade [slide] now we have a WORLD market, with one price and one quantity.
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10b.+Trade+Policies+and+Instruments - Lecture 13...

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