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360-6 - Chapter 6 Tariffs Intl trade In the process of...

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Chapter 6 – Tariffs Int’l trade: In the process of raising a country’s overall consumption, production, prosperity, wealth, and standard of living, there is (are): a) redistribution of production and b) changes in factor prices (wages, rents). Therefore, there will some groups that will be worse off temporarily, and will therefore oppose free trade, and will lobby for commercial policy to influence the quantity and composition of imports (mostly) with: Tariffs: taxes on imports. Quotas: restrictions on imports (mostly), e.g. foreign sugar, peanuts. Subsidies: payments to domestic producers to encourage X, discourage M, e.g. sugar. Nontariff Barriers : Health and safety standards, human rights, embargoes (Cuba), other issues - drugs (Colombia). CH 6: Theoretical analysis of tariffs CH 7: Nontariffs barriers and arguments for protection GAINS FROM FREE TRADE Static gains from trade , see Figure 6.1 on p. 149. Free-trade int’l. price is ρ F and free trade results in production moving from A to _____ and consumption moving from A to _____ . The higher-valued, larger bundle of free-trade goods at _____ could never have been purchased in autarky. There are two gains to trade: Consumption gains: Suppose free-trade at ρ F with no change in production (A). Consumption would increase to Point B because of the opportunity to trade at world prices, a welfare improvement in consumption vs. autarky. Production gains : As production shifts to Point X, there are further gains as resources are reallocated to the country’s comparative advantage industry (S), and consumption increases to Point C, another welfare improvement. CIC 0 to CIC 1 = Consumption Gain (static, short run) CIC 1 to CIC 2 = Production Gain (static, short run) Dynamic Gains : Economic growth over time (long run) from trade, the PPF shift outward, for several reasons. 1. Imports of capital goods (machinery, equipment, etc.) that increase the capital stock of the country (vs. autarky) can lead to improvements in productivity over time. 1
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2. With new technology there is international diffusion , the transfer, sharing, licensing of new technology – printing press, robotics, software, computer technology, medicine and drugs, motor vehicles, satellites, etc. 3. Increased competition leads to greater pro-competitive efficiencies (“competition breeds competence”), increasing long-run growth because of increased efficiency in domestic production and a reduction in the power of local monopolies. 4. Economies of scale lead to greater efficiency (lower costs) as industries expand. With a bigger world market, companies spend more on R&D, spread FC over larger Q, e.g. software, prescription drugs, textbooks, etc. 5. Trade increases the supply of credit (savings), which fuels more capital investment, increases economic growth. Reasons: a) higher national income increases domestic savings, and b) _______________________________________________ .
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