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Ch19 SH - International Trade Comparative Advantage and...

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International Trade, Comparative Advantage, and Protectionism Trade Surpluses and Deficits The Economic Basis for Trade: Comparative Advantage Absolute Advantage versus Comparative Advantage Terms of Trade Exchange Rates The Sources of Comparative Advantage The Heckscher-Ohlin Theorem Other Explanations for Observed Trade Flows Trade Barriers:  Tariffs, Export Subsidies, and Quotas U.S. Trade Policies, GATT, and the WTO Free Trade or Protection? The Case for Free Trade The Case for Protection An Economic Consensus
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2 FIN CRISIS IMF RX FOR THE DEVELOPED WORLD VERNACULAR Prognosis ‘Rebalance & Consolidate’ - You’re maxed out - The party’s over Solution - Fiscal contraction; credible plans to cut deficits & pay down public debt (increase taxes, cut spending) - Review pensions policy (raise retirement age in line w/life expectancy -Trade policy – reduce C/A deficit - Higher growth would help – or Incr in productivity/new technologies - Joint devaluation of $, Euro and other dev world currencies - average person does not benefit; take home pay less - work longer hours and years - Days of cheap imports in mega- stores are gone - Some firms export & grow; but significant job loss (restructuring) Consequences - Changes in labor rules/policies - Changes in product prices & currency values - Change in Social Contract - Trade Unions feisty; strikes Results - Slower growth - Slower increase in living standards “Resolving the Crisis Legacy & Meeting New Challenges to Financial Stability”, IMF 2010
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  Which country? A BIG export-oriented economy is booming but its trading  partners are livid. Year after year, they point out, it runs  large current-account surpluses. The country regards itself  as an export powerhouse whose goods are prized abroad.  Others castigate it for mercantilism. Some argue that it  subsidizes its exports unfairly by giving exporters credit at  cheap rates and by keeping its currency artificially  undervalued.  Pressure builds on the country to revalue its currency and  boost domestic consumption, which makes up an  unusually small share of its GDP. 
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International Trade, Comparative Advantage, and Protectionism - The “internationalization” or “globalization” of the U.S. economy has occurred in the private and public sectors, in input and output markets, in firms and households and more recently, in the services sectors. -Global trade grown faster than GDP since WWII -1970 – imports c. 7% of US GDP, now c. 17%; now - surrounded by imported goods -Openness to trade: - (X + M)/GDP - small countries more open
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The Balance of Payments Balance of payments The record of a country’s transactions in goods, services, and assets with the rest of the world in a given period; also the record of a country’s sources (supply) and uses (demand) of foreign exchange.
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The Balance of Payments: The Current Account
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