CHAPTER 6 - CHAPTER 6: TARIFFS Commercial Policy: Actions...

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CHAPTER 6: TARIFFS Commercial Policy : Actions taken by the government to influence the volume and composition of trade flows. Examples of government commercial actions: tariffs, quotas, quotas+tariffs, and subsidies Gains from Free Trade A. Static Gains from Trade 1. Static consumption gains from trade : Improvement in ITOT over the Autarky relative price . Isolate gains from production by keeping production at the autarky point A. Then the movement from A to B along the ITOT is the consumption gains (movement from CIC 0 to CIC 1 ). Static Production gains from trade It is the movement from point B to point C, or from the ITOT going through the autarky point A to the parallel ITOT going through the production point after specialization . Recall that ITOT can be used to determine GDP. This gain is due to channeling more productive resources into the economy’s comparative advantage industry while keeping ITOT neutral. Because of this redistribution of resources, overall output GDP rises. Gains are measured in units of S . B. Dynamic Gains from Trade Dynamic gains are a result of increases in economic growth as represented by outward shift in PPF. Thus, trade can shift PPF out without changing resources. Sources of Economic Growth In general, there are 3 sources of economic growth: i. increases in the labor force
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ii. increases in the capital stock iii. improvement in technology ( productivity ) International Trade and Economic Growth International trade is related to economic growth in several ways: 1. Countries can export consumer goods and imports capital goods, thus increasing the capital stock, which increases economic growth (e.g. China, South Korea). 2. International trade enhances the diffusion (transfer) of technology , which thus increases productivity and economic growth. 3. International Trade is pro-competitive . Local monopolies lose power over local markets. Thus, the price moves closer to MC (perfect competition which is the most efficient market structure). Businesses have to become more efficient, i.e . more productive since perfect competition implies efficiency . Also, competition destroys the extra profit, known as scarcity rent as a result of scarcity created by the monopolists. This in turn saves resources from being wasted on rent- producing industries. 4. If economies of scale exist, then trade pools markets and makes room for average cost (AC) to go down as production increases. ( economies of scale : total cost less than doubles when output doubles) Graph: Economies of Scale 5. International Trade can increase the pool of national savings by increasing income (saving = %*national income) and by providing opportunity for countries to borrow from international markets. This increases investment and the capital stock. Tariffs
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CHAPTER 6 - CHAPTER 6: TARIFFS Commercial Policy: Actions...

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