International Econ Midterm - SIS 616
Trade lines
"consumption possibilities curve" with trade
When a country opens up to trade, there are various effects on demand:
-Access to a new market through exports ⇒ demand shifts right -Competition from imports of differentiated goods ⇒ demand shifts left -Consumers have more choice ⇒ demand becomes more elastic
Should a country restrict migration?
-Effects on government budget: revenues (tax and remittance) versus spending (benefits, transfers) -External costs and benefits: knowledge benefits versus congestion costs and social frictions -Net benefit is more likely if the immigrant is a young adult, better educated, and in better health
More immigration will lead to:
-Higher GDP growth (because population growth) -Higher share of GDP per native person -No effect on the employment rate of natives -Firm gains -No effect on average wages -Some worker losses, especially for high-school dropouts that are most similar to low-skilled migrants -Migration pushes natives into other occupations, sometimes complementary occupations (language/communication focused) -Increased specialization and gains Transition costs
Arguments for import protection
-If domestic production of that product is particularly beneficial -If employment in that industry is particularly beneficial -If consumption of the good is particularly bad -If the government needs more revenues -If it is desirable to enhance the incomes of the factors used intensively in the import-competing industry
Why choose tariff over subsidy?
-Lobbies -Subsidies have to be re-approved for every budget -Government revenue v. government spending -Infant-industry argument -Dying industry argument -National pride -National defense -Income redistribution
As production and consumption change with growth:
-Production effect: shift of the PPC -TofT effect: change in the price line
Trade Adjustment Assistance
-Provides up to 130 weeks of income maintenance payments with condition of attending trainings for those who lost jobs due to trade competition -Limited wage insurance program (for >50yo workers who find lower-paying jobs than before) and reimbursement for job search and relocation costs -Moving and health insurance expenses
How does economic growth affect trade?
-Real investments expand countries' stocks of physical capital -Population growth (incl. migration) affects size of labor force -Education and training affect skill of labor force -Climate and discoveries affect land and natural resources -New technologies affect production capacities -New products affect consumer choices and tastes
As a country opens up to trade, the following will change:
-The production point -The consumption point -The price line
The effect of the tariff will depend on:
-The size of the tariff -The size of the country
Trends in international trade
-World trade has grown on average twice as fast as world output. -Developing countries, especially emerging economies, played a large role in that growth.
Suppose that the economy consists of South Korea and China which both produce rice and tea. South Korea has the following labor productivities: 0.4 units of rice per labor hour and 0.8 units of tea per labor hour. China has the following productivities: 1 unit of rice per labor hour and 0.25 units of tea per labor hour. What is the opportunity cost of rice production in China?
.25
If the labor productivity of Country A is such that it can produce 10 chairs in one hour, then the number of labor hours needed to make one chair is:
0.1
Market
A decentralized collection of buyers and sellers whose interactions determine the allocation of a good or set of goods through exchange
Comparative advantage
A person, company, region or country is said to have a comparative advantage in producing a good or service when the opportunity cost of producing that good or service is lower than in other countries
Countervailing duties
A tariff used to offset the price or cost advantage created by another country's export subsidy
Which of the following events is most likely to lead to an increase in the demand for burgers?
An increase in the price of hot dogs
Tariff versus subsidy
Both the $30 tariff and the $30 subsidy increase domestic production by the same amount. But tariffs increase domestic price, while subsidies do not affect price (only revenue), so tariffs lead to a consumption loss.
International factor-price equalization
By equalizing product prices across countries, trade will eventually also equalize the prices of the inputs into production
Dynamic comparative advantage
Comparative advantage can evolve through time as: -individuals acquire more skills -industries innovate new technologies -consumer preferences change -exchange rates evolve -input prices change
Net national loss from a tariff for a small country
Consumers -(a+b+c+d) Producers +a Gov +c Net -(b+d) Area b is the production loss, Area d is the consumption loss
Small country - Import quota net welfare effect
Consumers -(a+b+c+d) Producers +a Gov +c Net -(b+d) The effect of the quota is similar to that of a tariff except area c, the price markup, does not necessarily go to the government in the case of a quota It depends how import licenses are allocated: -If the licenses are allocated for free, the owners of the licenses get c -If the licenses are auctioned, the government gets a part of c and the owners gets the rest -If the licenses are allocated after resource-using application procedures (production capacity, first-come first-served), some of area c is a loss to the country
Export subsidies effect - Small country
Consumers -(e+f) Producers e+f+g Government -(f+g+h) Net effect -(f+h) Consumption loss: f is the loss from consumers being squeezed out of the market by higher domestic price. Production loss: h is the production loss from encouraging production by producers that have a higher cost than world price.
Export subsidies effect - Large country
Consumers -(e+f) Producers e+f+g Government -(f+g+h+i+j+k+l+m) Net effect -(f+h) -(i+j+k+l+m) Areas f and h are still the consumption and production losses, respectively. Extra loss (compared to small country) due to the decrease in world price of the export which decreases TofT of the exporting country.
Sovereign
Countries have -their own currency -their own barriers to trade (tariffs, quotas, standards...) -their own government taxing and spending -their own laws of citizenship and residence -their own language, culture and tastes.
Environmental Kuznets curve
Depicts stages of environmental degradation based on economic development. Highest point/turning point=industrialized economies
Demand curve
Dual interpretation; it represents: -the quantity that consumers will buy at each possible market price -the price that consumers are willing to pay for a certain quantity.
Supply curve
Dual interpretation; it represents: -the quantity that producers will offer for sale at each possible market price -the marginal cost of production for a certain quantity.
Increasing marginal costs
Each extra unit of the good requires more inputs to produce
In the absence of trade, the set of consumption possibilities for a country is:
Equal to the production possibility curve
Welfare effects
Examine the gains and losses for each group in terms of how much "surplus" they have before and after the policy change
There are two ways a large country can gain from growth in the sector that is traditionally imported:
Expansion of the PPC due to the increase in production, and improvement of the terms of trade due to the decrease in import demand
Export subsidies
Export subsidies are not allowed under WTO rules, except for farm products. Retaliation in the form of Countervailing duties
Agglomeration economies
External economies of scale explain the clustering of production and firms in specific areas
In the US-China trade war, China has imposed more tariffs than the US
False
True or False: The difference between internal and external economies of scale is that internal economies of sale relate to the size of the industry while external economies of scale relate to the size of the firm.
False
True or false: Free trade is a zero-sum activity because a county always gains at the expense of its trading partner.
False
True or false: The pollution haven hypothesis states that if countries want to attract foreign firms, they can decrease the level of stringency of their environmental regulation.
False
Leontieff Paradox
First studies of this topic (Leontieff 1953) found that US export were less capital-intensive than US imports The paradox ignores the large land endowments of the US. US and foreign technologies are not the same. Should differentiate between high-skilled and low-skilled labor.
Immiserizing growth
Growth that expands the country's willingness to trade can result in such a large decline in TofT that the country is worse of
Smoot Hawley tariffs (1930)
High US tariffs during Great Depression; Canada retaliated and European countries turned to other trading partners
If Iceland is consuming 80 million units of lumber and 50 million units of fish, and producing 30 million units of lumber and 70 million units of fish, then
Iceland is exporting 20 million units of fish and importing 50 million units of lumber
Monopolistic competition
If IES are large AND products are differentiated
Oligopolistic competition
If IES are large, market or industry dominated by a small number of sellers.
The following statement is NOT true about the effect of immigration on wages in the US:
In theory, wages should decrease as labor supply decreases
The issue with the theory of absolute advantage is:
It does not explain why a country which has an absolute advantage in the production of all goods would trade with others.
Which of the following is true of producer surplus?
It is the difference between the revenues received for the good and the costs of production
Factor endowments
Land, labor, capital, technology, etc...the major underlying source of comparative advantage, and thus a leading explanation of trade. More abundant factors are used more intensively in production.
Heckscher and Ohlin theorem
Nations will tend to export the goods that are produced using the relatively abundant factor(s), and to import those that are produced using the relatively scarce factor(s).
Only points _____ the PPC are efficient
On (points on the PPC use all the resources available)
Dispute Settlement Mechanism
One or several member country governments can bring a complaint that another member country is not abiding by global rules. Panel rules. If practices violate global rules then perpetrator requested to change. If it does not, complaining government can impose retaliatory penalties.
Biased growth
PPC shift is skewed b/c disproportionate growth in one sector
Balanced growth
PPC shifts out proportionately so relative shape is the same
Tariffs of Abominations (1828)
Passed to protect manufacturing industry in the Northern US from cheap British export -European blockade due to Napoleonic wars, and switch away from agriculture Southern states gave it the nickname because hurt in two ways: -South imported manufacturing goods from Britain -British needed revenue from exports to buy US cotton
Products whose trade appears to be inconsistent with H-O theory
Pharmaceuticals; Perfume and cosmetics; Iron and steel; Automobiles; Medical instruments (The factors of these products are not necessarily abundant in the countries that produce them)
Equilibrium
Price where the quantity consumers are willing to buy is equal to the quantity producers are willing to sell
Good is imported
QD > QS (excess demand is met by imports)
Good is exported
QS > QD (excess supply is sold abroad)
Production possibility curve
Shows all combinations of amounts of different products that an economy can produce with the full employment of its resources at their maximum productivity without trade.
Suppose that the economy consists of South Korea and China which both produce rice and tea. South Korea has the following labor productivities: 0.4 units of rice per labor hour and 0.8 units of tea per labor hour. China has the following productivities: 1 unit of rice per labor hour and 0.25 units of tea per labor hour. Which country has a comparative advantage in tea?
South Korea
Determining comparative advantage
Step 1: calculate the opportunity cost for goods within each country Step 2: compare the opportunity cost of a good across countries
Total surplus to the economy
Sum of the consumer surplus and the producer surplus
According to the Bruegel study (slide 23), the following statement is true:
The EU has the capacity to allow more migrants even based on the most restrictive criterion
Absolute advantage
The ability to produce something more efficiently than the rest of the world.
Willingness to Pay
The area under the demand curve
As a consumer moves away from the origin onto higher indifference curves, the following is true:
The consumer reaches more preferred combinations of goods
Which of the following refers to the consumption effect of a tariff on imported automobiles?
The decline in the purchases of the imported product due to the increase in its price.
Producer surplus
The difference between the revenues that producers receive for the goods that they produce and sell (the price) and the lowest possible price at which some producer would be willing to supply each unit (the supply curve).
Consumer surplus
The difference between the value that consumers place on the goods that they buy (the demand curve) and the actual payment that they make to obtain these goods (the price).
Which of the following is an impact of tariffs on the country imposing them?
The domestic consumers pay a higher price for the imported products.
Effective Rate of Protection
The extent to which the entire set of a nation's trade barriers raises (or lowers) a given industry's value added (VA). ERP=(NewVA-OldVA)/OldVA
TofT effect of tariff imposed by large country
The large country that imposed the tariff will import less because the tariff increases the price of the imported good -Weaker import demand increases competitive pressure on foreign suppliers and incentivizes them to lower their prices -The lower import price results in a TofT improvement for the large country.
Trade creation
The net new trade generated by a discriminatory arrangement, which arises from the fact that consumers now have access to lower-cost imports. Other gains: -Increased competition within the bloc can lower prices and production costs -Expanded production within the bloc can lead to achieving economies of scale -Increased opportunities within the bloc for business investment.
The production point in the presence of trade is represented by:
The point of tangency between the price line and the production possibilities curve
External economies of scale
The productivity and cost reductions that a firm reaps from its location or relocation. They depend on the size not of the firm, but of the entire industry.
Terms of trade
The ratio of export prices (PX ) to import prices (PM); TofT=PX/PM
Economics
The study of how economic players (individuals, firms, or governments) make decisions about the use of scarce resources, and how those decisions affect society
Calculate the tariff revenue for the US government.
The tariff revenue is equal to the amount of the tariff times the quantity of imports
Trade diversion
The welfare loss generated when trade is diverted from lower-cost outside suppliers to higher-cost trading partners. Or from trade remedies that lead production to move to different countries that are not the subject of those remedies.
Which of the following correctly identifies the impact of tariffs on the producers of competing products in the imposing country?
They can expand their production and sales.
How do NTBs work?
They reduce imports through one or more of the following direct effects: -Limit the quantity of imports -Increase the cost of getting imports into the market -Create uncertainty about the conditions under which imports will be permitted
The possibility of immiserizing growth can arise when:
a large country expands the production of its export-oriented goods
Specific tariff
a money amount per unit of import, e.g $20 per ton of steel, or $4,000 dollars per sports car
Monopsony power
a nation that has a large enough share of the world market for one of its imports that it can affect the world price of the product by changing the quantity of it imports
Tariffs
a tax on importing a good or service into a country
Infant industry argument
a temporary tariff is justified to reduce competition long enough for the infant domestic industry to learn how to produce at low enough costs to become competitive
Nontariff barriers to imports
any policy used by the government to reduce imports, other than a simple tariff on imports Includes both qualitative (local content, standards) and quantitative (quotas, VERs) measures.
Marginal cost of producers
area under the supply curve
Pull factors of immigration
attract migrants to a particular location. Improvements in economic, social, political, and environmental well-being. Geographical factors (distance) Cultural factors (colony, language) Network effects
Ways encouraging trade helps environment:
barriers on imports of fuel efficient cars, agriculture subsidies and pesticides
The standard theories of trade are best at explaining the following flows:
between developed and developing countries
Arbitrage opportunity
buy in one market and resell in the other
To draw the import demand curve:
calculate quantity demanded minus quantity supplied in the importing country for each price.
Ways restricting trade harms environment:
cheaper environmentally friendly products and technologies, global standards
Intra-industry trade
commerce involving goods & services produced by the same or related industries (e.g., autos vs. auto parts) (It has grown very rapidly due to economies of scale, the gains from specialization, and the multinational location of production facilities, including via offshoring)
Inter-industry trade
commerce involving goods & services produced by unrelated industries (e.g., wheat vs. steel)
Free Trade Agreements exception
concessions only apply to FTA signatories
Large country - Import quota effect
consumers -(a+b+c+d) producers +a gov c+e net e-(b+d) As with a tariff, a large country can gain from a quota. But a foreign country could retaliate.
The net national effect of a tariff for a large country
consumers -(a+b+c+d) producers +a gov c+e net e-(b+d) Gain or loss depends on the size of e compared to (b+d)
When a country opens up to trade, the demand suppliers face becomes more elastic because:
consumers have more choice of suppliers to buy from and so a change in the price of domestic suppliers can lead to a large change in the quantity consumed from that domestic supplier
"Race to the bottom" hypothesis
countries could use low environmental standards to attract investment
Following the imposition of a tariff, the domestic consumer surplus _______ by the area _______.
decreases; a + b + c + d
Research has found that air pollution patterns of production are in line with the Hecksher-Ohlin predictions of specialization since:
developed economies have specialized in the pollution-intensive goods (The Hecksher-Ohlin theorem states that countries should specialize in producing and exporting the good whose production is intensive in the factor that they possess in abundance. That means that developed economies, which are capital abundant, should specialize in the capital-intensive goods. And since capital-intensive goods also generally pollute more than labor-intensive goods, then this pattern of specialization should increase the pollution levels, everything else constant.)
The following statement is true about international factor price equalization:
empirical evidence supports it when adjusted for productivity
Generalized System of Preferences (GSP)
exempts WTO member countries from MFN for the purpose of lowering tariffs for the least development countries without also doing so for rich countries
Mercantilism
exports good, imports bad (false)
Short-run
factors of production are immobile
Long-run
factors of production can be reallocated to different sectors
Most Favored Nation (MFN) principle
governments that belong to the WTO agree not to discriminate among other member states, so any trade concession they make to their "most favored" trading partners must be extended to all other WTO members
Liberalization of trade
happening principally through tariff reductions
In the United States, the category of labor which has gained the most from trade is:
high-skilled labor
Specificity rule
if an externality is present, governments should intervene as directly as possible on the source of the externality
Rybczynski Theorem
in a two-good world, and assuming that product prices are constant, growth in the country's endowment of one factor of production, with the other factor unchanged, will: -increase output of the good that uses the growing factor intensively -decrease output of the other good
Composition effect
in line with H-O predictions: -Industrialized economies: CA in capital-intensive goods, which are polluting ⇒ emissions increased -Others: CA in labor-intensive goods, which are not pollution-intensive (in terms of air) ⇒ emissions decreased
Without using a graph, we can use our intuition to determine the direction of the change in consumer or producer surplus. If the price of a good decreases, the consumer surplus will _____ and the producer surplus will _____
increase; decrease
If a country has a comparative advantage in clothing then the following statement is true of the long-run gains and losses:
it depends on whether the production of clothing is a land-, capital- or labor-intensive in that country
Gains and losses in the short-run are sector-specific because:
it takes time for land to be retooled for another use
Production point
lies where the price line is tangent with the PPC (since the PPC represents the producer side of the market)
Consumption point
lies where the price line is tangent with the indifference curve (since the indifference curve represents the consumer side of the market)
Push factors of immigration
make migrants want to leave their current location. Economic: poor job prospects, income, standard of living. Social: poor educational opportunities, medical services, joining family. Political: religious or political persecution. Environmental: drought, famine, epidemics, and other disasters.
Second-best
market distortions such as externalities cause a divergence between private and social incentives, meaning a case can be made for government intervention
A market with many firms that produce goods that are close but not perfect substitutes is called:
monopolistic competition
Freer migration makes wage rates in the migrant-related occupations:
more equal between countries; directly competing workers in the receiving countries have their pay lowered while wages in the sending country increase
Ad-valorem tariff
percentage of the estimated market value of the imported good: 12% of the price of imported milk
Frankel and Romer (1999)
positive effect of trade on income and components: -capital depth (investment and pop growth) -schooling -productivity
Producer revenue
price x quantity
Everything else remaining unchanged, when the price of a normal good decreases, producers:
produce less of the good
One of the reasons that protectionists and government officials may favor using a quota instead of a tariff is:
quotas ensure that the quantities of imports are strictly limited
If a small country imposes a tariff on imported motorcycles, the world price of motorcycles will ________ and the domestic price of motorcycles will ________.
remain constant; rise
Higher TofT
represents an improvement, gain for a country because the country is either: -receiving more for its exports: higher PX -paying less for its imports: lower PM
Assume that a capital-abundant country trades only two goods with the rest of the world, medical equipment and corn. Medical equipment is relatively capital-intensive. According to the Rybczynski theorem, if the relative price of the goods remains unchanged, an increase in the country's endowment of capital will cause the output of medical equipment to _____ and the output of corn to _____ .
rise; fall
Indifference curves
shows all combinations of amounts of different products that an economy can consume such that consumer satisfaction is equal for all points on that curve
"Pollution Haven" Hypothesis
some countries specialize in producing dirtier goods
Externality
spillover effect associated with production or consumption that extends to a third party outside the market without permission or compensation.
According to the articles, one factor contributing to the decrease of the US comparative advantage in the tech industry is:
stricter immigration policies in the US
Based on the survey results we saw in class, the attitude of US workers towards trade is in line with the predictions of:
the Stolper-Samuelson theorem; The attitude of US workers towards trade is different for groups of different skill levels. This is in line with the Stopler-Samuelson theorem which predicts that the gains from trade in the long-run differ by factor of production. Low-skilled workers and high-skilled workers are factors of production.
Protectionism
the act of shielding a country's domestic industries from foreign competition E.g.: import tariffs, quotas, subsidies, tax cuts to local businesses, standards
Value-added
the amount by which the value of an article is increased at each stage of its production, exclusive of initial costs
Which of the following can help explain the rise of intra-industry trade:
the demand for product variety has increased substantially over time
Voluntary Export Restraints
the importing country government compels the foreign exporting country to agree "voluntarily" to limit its exports to the importing country (example - US-Japan autos)
Immigration
the movement of people from one country (the sending country) to another country (the receiving country) in which they plan to reside for some noticeable period of time
A large country can gain from imposing a tariff on the import of a good if:
the part of the tariff paid by the foreign exporters is greater than the losses arising from the production and consumption effects of the tariff in the domestic market
Product differentiation
the process of distinguishing a product or service from others, to make it more attractive to a particular target market
When a large country imposes an import quota:
the product's world price falls
Internal economies of scale
the productivity and cost reductions that a firm reaps from expanding its scale of production
Dumping
the sale of goods abroad at a price that is below "normal" or "fair market" value. Retaliation in the form of Anti-dumping duties (AD) equal to the discrepancy ("dumping margin")
Trade can be beneficial for the environment worldwide if:
the trade of environmentally-friendly technologies is liberalized
Opportunity cost
the value of the next best foregone alternative; measure of the trade-off involved in production decisions
If movement of labor across countries is costless and painless, it can be expected that:
the wage rates in the countries will equalize over time
Stolper-Samuelson theorem
trade will raise the real return of the factor used intensively in the rising-price (export-oriented) industry and lower the real return of the factor used intensively in the falling price (import-competing) industry
Ways encouraging trade harms environment:
transport emissions, pollution offshoring