IB Econ test 2

factors that cause private returns from production to be smaller than social returns of production

-knowledge spillovers, where firms learn from each other -capital market imperfections, where firms with new and sound ideas are unable to attract financing -the inability to coordinate activities between firms, when the success of an industry requires multiple players to enter simultaneously

labor and environmental interests agree on all of these complaints

-lower standards create a race to the bottom in standards -high standards countries either lower their standards or lose business -differing standards result in a lack of fairness giving those with lower standards an advantage.

trade barriers are less efficient bc

-make conditions worse rather than better, since some producers may move their facilities into the informal sector of the economy -barriers may come to be exploited by special interest groups for ulterior motives -trade barriers are very costly, creating DWL in consumption and prod at home -without coalition of countries, which are diff to assemble, the trade barriers may be ineffectual

what externalities may arise in a low income country after trade barriers are reomived?

-more incentive to exploit differences in env regulations to gain a cost adv. -more incentives exist to exploit certain low wage sectors of the pop, such as children, to again cost adv - more incentives to increase specialization to exploit comp adv, leading to bigger losses to less productive sectors of the economy

ways to handle diff standards abroad

-mutual recognition of standards, -harmonization of standards -separate standards (NOT optimization of standards)

International labour organization (ILO) revised by the ORg of Economic cooperartion and development (PROPOSED RULES)

-prohibition of forced labor -freedom of association -the right to org and bargain collectively -an end to exploitation of child labor -nondiscrim in employ (NOT THE PAYMENT OF LIVING WAGES)

trade barriers to enforce env standards have two claims

-reduce industrial competitiveness (env race to the bottom) -standards in rich countries cause them to "export pollution"to developing countries by relocating their dirty industries there

oligopoly

-some price setting power -few sellers -few products -moderate barriers to entry -pattern of production and trade is very diff to predict(each firm alters its output levels depending on what the comp does)

URUGUAY ROUND defined subsidies as

1 a direct loan or transfer 2 preferential tax treatment 3 supply of goods and services other than general infrastructure 4 income and price supports

four main arguments for protectionism

1 the retaliation argument(econ) 2 the infant industry argument(Econ) 3 the labor argument (econ) 4 the national security arg (non econ)

harmonization of standards

2 or more countries share a common set of standards in an area of concern, such as safety, fair comp

maquiladora zones allow firms to produce goods for export without paying tariffs on imported parts and materials that are used in production

2/3 of us mexico trade is intra firm

justification for targeting the development of a specific industry

counteract market failure, and implement a strategic trade policy (NOT punish a competitor)

protection in the US is usually obtained through direct action by the president or through one of the following different legal procedures

countervailing duties anti-dumping duties escape clause relief section 301 retaliation >(in each case a firm or gov agency may petition the fed gov to initiate an investigation into a foreign country's or foreign firms practices

Quotas

directly limit the quantity of imports

price setting power

downward sloping curve.

most of the worlds pop and a majority of countries are

either LOW or MIDDLE income

the cost of protectionism

even if trade doesn't give large dollar values of gain, it is better to keep trade open to that countries have good relationships. also gains from trade leaves out so many benefits that numbers cant always be trusted. Trade protection is inefficient in achieving the goals it seeks. the net national welfare loss per job is smaller since this effect of tariffs and quotas is a subset of the total impact on consumers.

rent seeking

firms hiring lobbyists that work to keep the tariffs in place

an import quota

generates rents that might go to foreigners (DOES NOT have the same effects on welfare as an import tariff, is NOT always less costly to a country than an import tariff<, Is NOT more costly to a country than an import tariff)

Industrial policy

gov policy to create new industries or support exisitng inds. >can impact trade patterns -high controversy -politically motivated and waste money

Transboundary env impacts

happen when one countrys pollution spills over into a 2nd country. can be mutual too. could resort tariff on output of polluting inds, embargoes, multicountry negotiations to avoid this.

in order for a country to "dump" a good on a foreign market it must have market setting power in the

home market

labor arg

ignores the fact that cross country wage differences reflect productivity differences -ignores te fact that tariffs or quotas are an expensive way to save jobs

Internal economies of scale give large firms a cost advantage over small firms and lead to an

imperfectly competitive market structure.(PRICE SETTERS)

infant government

in developing countries, tariffs are an attractive method of raising gov rev (Good pass thru customs, admin costs low, act like corp or luxury tax

New Trade theory

int trade based on economies of scale is one of the newest and most significant develop. in trade theoryand has increased our understanding of intraindustry trade

-innovation

it could isolate domestic firms from foreign competition and reduce the incentives to innovate. imports are often a major point of access to new tech and products

export labels provide an alt to use of trade barriers to promote env standards in partner trading countries since

lables might allow customers to determine whether products were produced ina n env sustainable fashion

the MAIN problem with imposing labor standards to prevent child labor and poor working conditions in the exporting sector of a less developed country is

less dev. countries are opposed to them (NOT too costly to monitor, NOT not willing to pay more for better conditions, and NOT countries cannot settle on a particular standard

no universal acceptance of..

limits on hours of work health and safety min wage

Quota rents

looks like the gov revenue. the box in the middle

most of the worlds pop and a majority of countries are

low or medium income

COMPARATIVE ADVANTAGE

mixed record diff to measure countries may have several products to choose from which utilize the abundant factor. diff to predict which one theyll produce

offshoring

movement of some or all of a firms activities to a location outside the home country

labor standards are

multifaceted- basic human rights(freedom from forced labor), and civil rights(union rep)

quota rents are computed by

multiplying the import volume by the quota induced rise in the domestic prce

cultural protection arg

music, movies, tv, theatre, art soem worry tht the most commercially viable firms will dominate if they dont use protection. and cultural values of the home country will be obscured or forgotten. -also could involve(more ocmplicated) the protection of non cultural industries for cultural reasons

industry policy tools

no direct subsidies allowed- but governments can use other policies: >providing information about foreign markets to domestic firms, >helping negotiate contracts, >lobbying foreign governments to adopt home country standards, >tying foreign aid to purchases from domestic firms. (PROBS: Requires governments to know the costs of production for foreign firms and correctly predict their reactions >hard to predict success >encourages rent seeking

PErfect competition

no price setting power low barriers to entry non diff products(identical) large # of buyers and sellers

dumping

occurs when an exporter sells a product at a price below what it charges in its home market and foreign market prices. must be able to show the injury to firms -used to drive comp out of business PROBLEMComparing domestic and foreign market prices is difficult due to differences in the price of transportation, wholesale, and other add-ons.

critics of trade want to use trade barriers to enforce env regs

polluting industries in countries with standards relocate to countries with lower standards -env standards reduce competitieveness

nominal rate

the rate that the tariff is levied on a given product

outsourcing

the reassignment of activities to another firm either inside or outside home country

the max the consumer will pay equals

the sum of the marginal utilities, which is the area under the demand curve

what is the MAIN problem with imposing environmental standards

they can cause potential export industries to shut down in poor countries

informal economy

untaxed, unregulated, and uninspected

national security arg.

weapon inds. or strategic tech. usually it is more efficient to build stockpiles of minerals or others materials by buying large quantities in peacetime when they are less expensive -it is diff to identify essential industries(may over protect) -costly means of accomplishing this end(better to offer domestic production subsidy)

retaliation arg

when a country is unfairly discriminated against in trade, retaliation is popular response. could provide incentive for negotiations but could also lead to escalating trade wars. -

race to the bottom

when companies feel forced to lower their own standards or move to a foreign location in order to reduce costs. trying to compete against each other for investment

two necessary conditions for dumping to occur

MARKETS ARE SEGMENTED, IMPERFECT COMPETITION EXISTS

which of the following does not help reduce the frequency of child labor?

a country's movement away from manufacturing and towards more agricultural prod

net private sector loss is shown as area

(b+c+d)

Intraindustry trade

- more broadly defined industries - high tech inds - countries that are more open to trade - in nations that received larger amounts of foreign direct investment -majority of US and Europe trade

internal economies of scale

-DEpends on size of firm -falling average costs over a relatively large range of output.size -confers a competitive advantage in the form of lower average costs. -intraindustry trade has this! -more likely to be ASSOCIATED with an imperfectly competitive market

Are there other characteristics of industries or economies that may also induce trade?

-Internal economies of scale -Industry structure & regional clustering

National welfare

-Trade based on external economies has an unclear effect on national welfare. -There may be gains to the world economy by concentrating production of industries with external economies. -But there is no guarantee that the right country will produce a good subject to external economies. -a country may be better off if it produces everything for its domestic market rather than pay for imports.

pollution havens

-an economic activity becomes concentrated in a country that has ess strict env controls than elsewhere. -countries that compete by offering foreign firms a reduced set of env compliance requirements

problems in the implementation of industrial policies

-choosing the industry to target -the encouragement of rent seeking by firms in other industries -the benefits are partly captured by foreign firms -knowing the optimum amount of resources to provide the targeted industry

External economies of scale

-depends on size of industry -average costs of a firm fall as industry grows larger, but may not rise as the representative firm grows larger -associated with a perfectly competitive industry -

what obstacles to increased int economic integration begin to appear after trade barriers are removed

-each country may set up diff standars, generating conflicts over enforcement and application -a countrys domestic regulations may unintentionally limit int commerce for that country (NOT inc comp adv will cause barriers to go back uo)

other potential costs

-innovation -retaliation -rent seeking

reasons for external economies of scale

-knowledge spillover, -labor market pooling, -specialized suppliers of intermediate goods (NOT large fixed costs)

Dynamic increasing returns to scale exist

Dynamic increasing returns to scale exist if average costs fall as cumulative output over time rises. >Dynamic increasing returns to scale imply dynamic external economies of scale.

The larger market means a country can specialize in a narrow range of products, with lower production costs. Trade means consumers actually have a larger variety of goods to choose from.

Economies of scale typically lead to a market structure other than that of perfect competition. Economies of scale mean large markets are desirable . Companies will pursue market power through product differentiation.

Grubel-Lloyd index

The broader the definition of an industry, the more trade appears to be intra-industry. If exports of a domestic industry are equal to imports from the same industry, the numerator is zero and GL = 1 and trade is completely intra-industry.

Gains from inter-industry trade reflect comparative advantage. Gains from intra-industry trade reflect economies of scale (lower costs) and wider consumer choices.

The monopolistic competition model does not predict in which country firms locate, but a comparative advantage in producing the differentiated good will likely cause a country to export more of that good than it imports.

The infant industry arg

a much more sophisticated arg. developing nations that protect their infant industries against competition of more mature firms in ind countries. -two beliefs: market force will not support the development of a particular industry(ind risky or other firms too est) >2nd industry has spillover benefits or positive externalities (linkages to other industries or technological nature) some inherent adv to buy from local producers PROBLEMS: diff to predict industries which will become competitive diff to det industries with falling costs -mever grow up

anti-dumping duties

a tariff levied on an import that is selling at a price below the products fair value (problems: defining fair value is subjective, and sntidumping duties are a source of tension between countries) APPROX 21 duties imposed per year

countervailing duties

a tariff that is granted to an industry that has been hurt by foreign country subsidies of its national firms- goal- raise price of foreign good enough to countervail the effect of the subsidy (used less often then other protection- defining a subsidy is objective)

The creation of an integrated market as a result of international trade results in

a wider range of choices for consumers, lower prices and more firms (each operating at a larger scale)

the two industries most commonly receiving protection are

agriculture and clothing

rent seeking:

any activity of firms designed to alter the distribution of income without adding to income (e.g. lobbying). Considered wasteful. When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.

Large countries may increase national welfare when they place a tariff on import

bc large companies reduce the world price of the import when they levy a tariff.

internal economies of scale lead to imperfectly competitive industries

bc large firms have cost advantages over small firms

retaliation

can add to the net loss of a tariff by hurting the export markets of other industries . affects consumers by forcing prices up and also affects workers and owners of capital of that particular industry

in order for countries to be integrated, standards

can differ, even persistently

allowed to use anti dumping duties if the price a foreign exporter

charges for the products it sells in the US is LESS than the price charged in the exports market, and the US firms are being harmed by import of the product (less than at home)

escape clause relief

clause in the US and GATT trade rules that permits an industry to escape the pressure of imports by temporarily imposing a tariff. Escape clause is a temp clause imposed on imports to provide a period of adjustment to a domestic industry.they have to petition directly for it for relief from sudden surge of imports (few cases are filed)

Monopoly

price setting power high barriers to entry

net loss

private sector loss plus the quota rents yield(benefits)

Senile industry protection

provide method to move resources to new industries without hurting the economy. -easier to pick these firms than the infant firms -difficulty lies in execution -more efficient to directly aid firms and workers

section 301 retaliation (Section of US 1974 trade act) requires USTR to take action

requires pres chief of trade negotiator(requires USTR to take action)- to take action against any nation that persistently engages in unfair trade practices. - US defines meaning of unfair trade practices

using trade protectionism can be grouped into six categories

revenue, jobs, industrial targeting, cultural protection, national security, & retaliation against unfair trade practices

strategic trade policy

selective use of trade barriers and industry subsidies in order to capture some of the profits of foreign firms (IND must have economies of scale and have market power >tries to convince foreign firms to leave industry by starting system of subsidies to new domestic firms

Mon Competition

some price setting power no barriers to entry PRODUCT DIFFERENTIATION large numbers of buyers and sellers - Firms produce with a technology that exhibits increasing returns to scale. -Firms can freely enter and exit the industry, so monopoly profits are zero in the long run. -are a lot of close substitutes (inc returns to scale will generate trade even when home and foreign have exact same tech and exact same factor env- not able to use H_O or Ricardian)

effective rate

takes into account nominal rate and any tariffs on intermediate inputs. related to the concept of value added. tariffs might be added to the materials that are inputs of a final product

where there are economies of scale, the scale of production possible in a country is constrained by..

the combined size of domestic and foreign market

Tariffs anq quotas cost consumers and are grossly inefficient means for creating or preserving jobs, but citizens allow these policies to exist bc

the cost of tariffs are diffused throughout a nation while benefits are concentrated. -incentives to organize around the issue of trade policy are asymmetric

intra industry trade is NOT especially common in agricultural sectors

the majority of US and euro trade is intra-industry trade

Value added

the price of a good - the cost of the intermediate goods to produce it

supposed Effective rate of protection is calculated to be 60%

the producer would be better off if they adopted free trade for all parts and final goods