International Economics Review Questions (Aquinas College) Ch. 1-4
Magnification effect
An extension of the stolper samuelson theorem, that suggests that the change in the price of a resource is greater than the change in the price of the good that uses the resources relatively intensively in its production process.
Autarky
absence of trade
Suppose that the production of $500,000 worth of steel in the United States requires $100,000 worth of iron ore. The U.S. nominal tariff rates for importing these goods are 15 percent for steel and 5 percent for iron ore. Given this information, the effective rate of protection for the U.S. steel industry is approximately:
18 percent
External economies of scale
Cost reductions for a firm that occur as the output of the industry increases.
Explain the thought process behind the "since you can't grow sugar, make cocaine" situation in the book:
Countries that are deprived of valuable foreign exchange earnings and who have been prevented from selling sugar on major markets turned their crop land into the production of coca used in cocaine production. pg. 88
Economic growth seems to be tied to openness, why would you want economic growth?
Countries that open their country to international trade often benefit from new technologies, stability for producers, and provide other sources of economic growth. pg. 14
Home market effect
Countries will specialize in products for which there is a large domestic demand.
A terms-of-trade index that equals 150 indicates that compared to the base year:
It requires a lesser amount of domestic goods to obtain the same amount of foreign goods
The allocation of quota rights, except when those rights are auctioned off, is inherently arbitrary and increases the power of government bureaucrats, thereby fostering corruption. WHAT SIGNAL DOES THIS SEND TO ENTREPRENEURS IN DEVELOPING COUNTRIES?!?
It tells them to invest in political influence rather than productive efficiency.
If the sugar tariff is so deadly to American jobs, why don't we just get rid of it?
because the downstream effects of the tariff actually produces more jobs. Which means we put a tariff on sugar and that makes domestic pries higher than the world prices which makes companies source their sugar from lower priced countries. We lose job in the sugar industry but we gained far more jobs in downstream industries like candy, or any type of refining process. People buy more lifesavers than pure sugar.
labor theory of value
a theory where the cost or price of a good depends exclusively upon the amount of labor required to produce it
free trade
a trading system of open markets between countries in which nations concentrate their production on goods they can make most cheaply, with all the consequent benefits of the division of labor
trade triangle
a triad is formed in the production possibility diagram showing a countries exports, imports, and equilibrium terms of trade
In Figure 2.4 the marginal rate of transformation of wheat into autos is
a. one and two-thirds
economic interdependence
all aspects of a nations economy are linked to the economies of its trading partners
Factor endowment theory
asserts that a country exports those goods that use its abundant factor more intensively. (this gets you a nobel prize)
According to Figure 4.1, the tariff results in the Mexican government collecting:
b. $120
Consider Table 4.1. Prior to the tariff, the total price of domestically-produced VCRs is:
b. $200
Referring to Table 2.1, the United Kingdom gains most from trade if:
b. 1 ton of steel trades for 3 televisions
Consider Figure 2.2. With trade, Canada consumes:
b. 12 televisions and 16 refrigerators
exit barriers
barriers such as cost conditions that make lengthy industry exit a rational response by companies
What is this noise, companies produce more, generate more tax revenue, enables ____________________
more R&D money
Following World War II, The U.S.:
negotiated reductions in trade barriers with other countries
Best argument for government policies, positive externalities. What arguments does he have against this? HAYEK!
pg. 100s Definition: A positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. Third-parties include any individual, organisation, property owner, or resource that is indirectly affected.
Deadweight cost
refers to the protective effect of the tariff which allows domestic firms to increase production above free trade levels (area b). Consumer deadweight cost—the value of lost consumer satisfaction due to a shift in consumption to less-desired substitutes brought on by the higher price (area d). Total deadweight cost = ½ x tariff x reduction in imports (with linear domestic demand and supply curves for a small country)
region of mutually beneficial trade
regions that mutually benefit because of the cost ratios of trading
Tariffs tend to be ____________________________ taxes
regressive taxes, the burden falls most heavily upon those with the least!
dynamic gains from international trade
the gains from international trade in the countries growth rate and thus on the volume of additional resources made available to, or utilized by, the trading country
consumption gains
the increased amount of goods made available to consumers as the result of international trade.
Can you define GDP?
the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time.
term of trade
the terms where the price at which two products are traded in the market place
theory of reciprocal demand
theory that states the terms of trade is determined by the strength of each country's demand for the other country's product
Bottom line
there is a lot to keep track of. How skilled labor is, is constantly changing, relative prices are constantly changing, central bank policy is constantly changing.
Small countries tend to have higher measures of openness than larger countries because:
they are more reliant on international trade
A few reasons for intra industry trade.
- Not all goods are the same - Transportation costs - Seasonal
Dynamic Comparative Advantage
A changing pattern in comparative advantage; governments can establish policies to promote opportunities for changes in comparative advantage over time.
The trade model of the Swedish economists Heckscher and Ohlin maintains that:
A country exports goods for which its resource endowments are most suited
Refer to Figure 2.1. If the relative cost of steel were to rise, then the production possibilities schedule would:
Become steeper
For a nation to maximize its productivity in a global economy:
Both imports and exports are necessary
Is this openness number almost completely meaningless?
Butler would argue yes. Yes because the book implies that the number changes based on the size of the country so it's a percentage of GDP so it is skewed for large countries and small countries so it makes the number non-important. Doesnt really tell you the true openness.
Consumption gains
Post trade consumption points outside a nation's production possibilities schedule.
What did Ricardo assume the only factor input was?
Ricardo assumed labor was the only factor input, but really, there are a ton!
Concerning the influence that transportation costs have on the location of industry, which of the following industries has generally attempted to locate production facilities close to resource supplies?
Steel
Table 1.3 - Meijer in #s
Table 1.3 shows the top 10 countries with whom the United States trades. Biggest to smallest: Canada, China, Mexico, Japan, Germany, UK, South Korea, France, Brazil, Thailand.
Which trade policy results in the government levying a "two-tier" tariff on imported goods?
Tariff quota
The introduction of community indifference curves into our trading example focuses attention on the nation's:
Tastes and preferences
How does vertical specialization make you feel about statistics?
That statistics are often misleading
Consider Figure 4.1. With a per-unit tariff of $3, the quantity of imports decreases to:
b. 40 calculators
Trade____________________________cause environmental issues
does not directly cause environmental issues
Labor theory of value
the cost or price of a good depends exclusively upon the amount of labor required to produce it. OKish idea if you make a lot of assumptions
To justify the subsidies it has received from European governments, The Airbus Company has used all of the following arguments except:
Airbus' subsidies were totally repaid as the firm realized profits on its aircraft sales
Economics interdependence
All aspects of a nation's economy are linked to the economies of its trading partners.
Concerning international trade restrictions, which of the following is false? Trade restrictions:
Cause nations to produce inside their production possibilities curves
Page 91 graph.
China's exports and imports as a percentage of GDP
Chinese manufacturers face rising wages because of:
China's one-child policy, land policies, bureaucratic delay in being declared an urban dweller
Explain the Chrysler example on Page 37
Chrysler wasn't / isn't competing with other car companies, it is competing with other American firms for capital / labor.
Which of the following would least likely apply to the product life cycle theory?
Coal and crude oil
Tariff Escalation
Common situation where the import duties on components or raw materials are lowest, and move progressively higher on semi-finished goods upwards to the finished goods. See also tariff anomaly.
4. Suppose an importer of steel is required to pay a tariff of $20 per ton plus 5 percent of the value of steel. This is an example of a (an):
Compound tariff
Specific factors theory
Considers the income distribution effects of trade when factor inputs are immobile among industries in the short term
Heckscher Ohlin theory
Differences in relative factor endowments among nations that underlie the basis for trade.
Modern trade theory contends that the pattern of world trade is governed by
Differences in supply conditions and demand conditions
The principal benefit of tariff protection goes to:
Domestic producers of the good produced
Given free trade, small nations tend to benefit the most from trade since they:
Enjoy terms of trade lying near the opportunity costs of their large trading partners
The Leontief paradox questioned the validity of the theory of:
Factor endowments
Offshore Assembly Provision (OAP)
Import duties only get applied to the value added in the foreign assembly process ex: ship $k of parts to mexico for assembly. Final good is worth $1500 Assume the tariff is 20% w/o OAP - the tariff would be $300 (total $1800) w/ OAP - the tariff would be $100 (total $1600)
The movement to free international trade is most likely to generate short-term unemployment in which industries?
Import-competing industries
Arguments for U.S. trade restrictions include all of the following except
Improving incomes for developing countries
Principle of absolute advantage
In a two nation, two product world, international specialization and trade will be beneficial when one nation has an absolute cost advantage in one good and the other nation has an absolute cost advantage in the other good.
Smith quote page 31, "All commerce that is carried on betwixt any two countries must necessarily be advantageous to both" "And therefore all duties customs, and excise (on imports) should be abolished and free commerce and liberty of exchange should be allowed with all nations" Question - Does what Smith is proposing follow from his first statement?
In theory, yes. He is saying that in order to make these trades more advantageous to both (as well as easier to initiate) then "free trade" should be imposed.
Production gains
Increases in production resulting from specialization in the product of comparative advantage.
Proponents of ____ maintain that government should enact policies that encourage the development of emerging,"sunrise" industries.
Industrial policy
Linder's theory of overlapping demand provides an explanation of:
Intra-industry trade
The deadweight loss of a tariff:
Is a social loss since it promotes inefficient production
Are imports of professional services higher or lower than exports?
Lower? Because we have moved from manufacturing to service based economy. pg. 11 FTUF
Quantity theory of money
MV = PY ( m-money supply, v- velocity, p-price, y-gdp) Velocity and GDP are constant 2xM V = PY 2xM V = 2xPY (if M is 2x then so is P, so it doesnt work)
Theory of overlapping demands
Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods; wealthy nations will likely trade with other wealthy nations, and poor nations will likely trade with other poor nations.
According to the specific factors trade theory:
Owners of factors specific to export industries gain from trade, while owners of factors specific to import competing industries suffer
Protectionism: Political Benefits?
Pg. 107 FTUF - trade protection can improve welfare - used to improve terms of trade, promote industries with positive externalities, or capture rents in international markets - trade restrictions can raise national income by changing the ratio at which country exchanges exports for imports - OPEC - when they serve as a second best measure to promote industries that generate positive externalities - using trade policy to correct market failures is often problematic - can help capture rents or profits from the international market - strategic trade policy - these three ways are only capable of success in some markets
Who do embargoes end up hurting the most?
Pg. 39 - Uses Embargo of 1809 to describe the situation - US closed american ports to international trade - US closest to autarky than ever - starting having to focus on import replacement manufactured goods (comparative disadvantage) - less utilization of american resources - cost 8% of America's GDP They often end up hurting the country that enacted the embargo because it forces a country to begin producing products that they have a comparative disadvantage
Apples example in book - are all goods/services created equal? Are all call centers created equal? How easily is it to split up all of these markets?
Pg. 4-5 in Econ book.
When a nation achieves autarky equilibrium:
Production equals consumption
Internal economies of scale
Reductions in the average total cost of producing a product as a firm increases the size of its plant in the long run.
________________________ of the resource endowments are what will ______________ the comparative advantage, NOT the absolute amount of each.
Relative amounts of the resource endowments are what will drive the comparative advantage, NOT the absolute amount of each.
Free traders maintain that an open economy is advantageous in that it provides all of the following except
Relatively high wage levels for all domestic workers
Page 34: Comparative Advantage
Ricardo theorized that countries may import items even if they can create them more efficiently than other countries and conversely other countries could export items even if other countries could produce them more efficiently. Countries benefit from trade not driven by absolute cost, driven by opportunity cost
The Leontief paradox:
Suggested that the U.S. exports labor-intensive goods
Technology as a Source of Comparative Advantage
The Product Cycle Theory
A $100 specific tariff provides home producers more protection from foreign competition when:
The home market buys cheaper products rather than expensive products
Among the determinants underlying a country's international competitiveness in business services (e.g.,construction) are:
The potential scale economies afforded by a market's size, Abundance of equipment including data processing facilities and computers, Skills and capabilities of employees and their wage rates,
Openness
The ratio of a nation's exports and imports as a percentage of its GDP. Openness = (Exports + Imports) / GDP US openness has increased over the years.
In explaining international trade, the product life cycle theory focuses on
The role of technological innovation
Marginal Rate of Transformation (MRT)
The slope of the production possibilities schedule that shows the amount of one product a nation must sacrifice in order to get one additional unit of the other product. Another way to think about this is opportunity cost. MRT = change in y / change in x
Tariffs tend to be ________________________ in nature
These tariffs tend to be regressive in nature! Hurting the very people they claim to be helping!
The cost of Anti Import Policies
They reduce trade and tend to distort economic activity, leading to inefficient outcomes. Their effects can be separated into two components. They redistribute income from domestic consumers to domestic producers. Even worse, they distort prices and therefore economics incentives.
If venture capitalists struggle to pick winning companies, why is government going to do any better?
They're not
Are you more or less likely to talk to someone in another country today, or 50 years ago? Are you more or less likely to conduct business with a company in another country? Are you more or less likely to travel to a foreign country?
Today more likely more likely
Also, wouldn't it be great if you could just redistribute the saving from consumers directly to the people who previously held the jobs? Flaws in this grandiose idea?
Transferring wealth in this manner still requires a significant portion of the population to be consumers and eventually this group of consumers will want to be on the receiving end. You are also relying on that consumer base to continually increase consumption to support displaced workers.
Intra-industry trade can be explained in part by:
Transportation costs between and within nations
Foreign-Trade Zone
U.S. site at which foreign merchandise can be imported without immediate payment of duties or tariffs does not require inspection by U.S. Customs
Who is most likely to be hurt by trade? International trade? What is the flip side of this coin?
Unskilled workers. The flipside is that international trade does benefit many workers because they get to shop for the cheapest consumption of goods and permits employers to be purchase tech to best complement the worker's skills. Trade allows them to become more productive. pg 20 - 21
Promoting our ethanol over better ethanol, explain... page 67.
We promote some ethanol at the expense of "better" ethanol. we make corn based ethanol but other, cheaper, sugar based ethanol from Brazil has a 2.5% tariff on it to protect Midwestern corn farmers. Using the sugar ethanol would be environmentally friendly, it would reduce our reliance on oil, and it would be cheaper but this trade policy is attempting to support special interests at the expense of the environment Subsidies/tariffs distort market signals, have prevented solar panel adoption, etc.
Who stands to gain more from trade, large or small countries?
What does it mean to gain more? Economic gain? In that case I believe it is small countries because it allows them to import a plethora of items and export what they have a specialization in. Allows for their market to diversify.
Principle of Comparative Advantage
When each nation specializes in the production of that good in which it has a relative advantage, the total output of each good increases, thus, all countries can realize welfare gains.
Law of comparative advantage
When each nation specializes in the production of that good in which it has a relative advantage, the total output of each good increases, thus, all countries can realize welfare gains. You produce the good with the lowest opportunity cost. Also increases the number of firms in the market and creates competition.
Assume the cost of transporting autos from Japan to Canada exceeds the pre-trade price difference for autos between Japan and Canada. Trade in autos is
a. Impossible
As an economy opens up to international trade, domestic prices
become more aligned with international prices
Free trade policy is ___________________________.
consistent. American auto industry doesn't want tariffs on some goods, but it does on others. (Also, intermediate goods!)
Consider Figure 4.1. With free trade, Mexico imports:
d. 100 calculators
Referring to Table 2.2, the opportunity cost of one VCR in South Korea is:
d. 2 tons of steel
Protective and Revenue Tariffs
designed to shield domestic production from foreign competition by raising the price of the imported commodity. Revenue tariffs are designed to obtain revenue rather than to restrict imports.
Specific factors
factors of production that are unable to move into or out of an industry
Factor price equalization
free trade's tendency to cause cheap factors of production to become more expensive, and the expensive factors of production to become cheaper Literally supply and demand. Brilliant.
production gains
gains in production resulting from specialization in the product of comparative advantage
gains from international trade
gains international trading partners enjoy due to specialization and the division of labor
Central planning
has lead to some of the largest environmental disasters. definition: A centrally planned economy is an economy where decisions on what to produce, how to produce and for whom are taken by the government.
Page 35 - There is an idea that trade is indirect production...how?
indirectly obtaining goods through importing them = comparative advantage or international trade. Directly obtaining goods through domestic production.
Producing goods for export produces:
jobs and income
Bonded Warehouse
location maintained by importers ensuring that all customs obligations will be satisfied goods may be stored for maximum of 5 years requires inspection by U.S. Customs Service
Page 72 Unintended consequence of restricting trade on paper products
loss of more forest! When we restrict or reduce trade in forest products we forget that most forest products are used domestically in developing countries. When we reduce or restrict them, we take away demand and lower the price which in turn lowers the incentive for local users to keep/conserve the product.
What is vertical specialization? Does it change statistics in any meaningful way? Page 18 and 19
occurs when a country uses imported intermediate parts to produce goods it later exports. This definition captures the idea that countries link sequentially to produce a final good. - fragmentation of the production process as intermediate goods and components become a greater part of world trade. Does it change statistics in any way: Yes, it skews the value of a country's imports and exports. Makes U.S. import statistics quite misleading as to the true origin of a particular product. Overstated or understated trade deficits with countries. (Think the U.S. and China with the Iphone).
Intra industry trade can be explained by______________________________
product differentiation and economies of scale.
commodity terms of trade
term of trade that measures the relations between the price of exports and the prices of imports. Also called barter terms of trade
The immediate basis for trade is ________________ ...
the difference in pre trade relative prices; depends on the PPC and demand conditions. Boiled down - demand, tech, resource endowments determine PPC
globalization
the process of greater interdependence among countries and their citizens
Ad Valorem Tariffs
this type of tariff is levied on a good based on a percentage of that good's value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles. The 15% is a price increase on the value of the automobile, so a $10,000 vehicle now costs $11,500 to Japanese consumers. This price increase protects domestic producers from being undercut, but also keeps prices artificially high for Japanese car shoppers. http://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp
Why do nations trade?
- Production costs differ among nations due to different productivities of factor inputs - comparative advantage
Which of the following is a fixed percentage of the value of an imported product as it enters the country?
Ad valorem tariff
When the production of a commodity does not utilize imported inputs, the effective tariff rate on the commodity:
Equals the nominal tariff rate on the commodity
Industrial policy
Government policy that is actively involved in creating comparative advantage.
Incomplete specialization may be caused by
Increasing opportunity cost
The simultaneous import and export of computers by Germany is an example of:
Intra-industry trade
Economies of scale
When increasing all inputs by the same proportion results in a great proportion of total output.
Say you do want to protect jobs, is there a cost at which you aren't willing to?
When the cost of protecting jobs affects the demand for a good or service.
constant opportunity cost
a constant rate of sacrifice of one good for another as a nation slides along its production possibilities schedule
trading possibilities line
a line in a production possibility diagram representing the possible terms of trade ratio
agglomeration economies
a rich country specializes in manufacturing niches and gains productivity through groups of firms clustered together, some producing the same product and others connected by vertical linkages
importance of being unimportant
when one trading nation is significantly larger then the other, the larger nation attains fewer gains from trade while smaller nations attain most of the gains from trade
Interesting question about free trade, who is really opposing it? This fits in nicely with Chapter 3 in the textbook.
specific groups that benefit from trade barriers and have more political power than their numbers. Labor Unions - Ultimately, what unions fear the most is increased competition from non-union businesses that benefit from free trade. Thus, despite the economic boom that has coincided with greater international trade, labor will continue its fight to "protect" jobs and frustrate free trade initiatives.
When communication/transportation costs are high, what sorts of things will be traded? Does this have to be restricted to final goods and services?
the most expensive items like silk or spices. (in book the para. begins with: before, when transportation and communication costs were high...)
Globalization
the process of greater interdependence among countries and their citizens. It is political, technological, and cultural as well.
What are the fallacies of free trade?
- Results in zero sum game - imports result in unemployment and burden the economy - tariffs, quotas, and other barriers result in more jobs for domestic workers
Why is Globalization Important?
- Thanks to trade, you can enjoy goods/services you typically wouldn't have access to. In the middle of winter in Michigan, you can still buy fruit! - increases competition from gains in international trade. - economies grow with openness and trade - increase demand for economies in countries with rapid growth like China and India - more firm turnover
Agglomeration Economies
A rich country specializes in manufacturing niches and gains productivity through groups of firms clustered together, some producing the same product and others connected by vertical linkages. Example - Car plants have their suppliers nearby.
Free trade
A system of open markets between countries in which nations concentrate their production on goods they can make most cheaply, with all the consequent benefits of the division of labor.
Absolute Advantage
Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that same good or service. Entities with absolute advantages can produce a product or service using a smaller number of inputs and/or using a more efficient process than other entities producing the same product or service. For example, the United States may produce 700 million gallons of wine per year, while Italy produces 4 billion gallons of wine per year. Italy has an absolute advantage because it produces many more gallons of wine - the output - in the same amount of time - the input - as the United States.
To mercantilists the wealth of the world was fixed, is this a good assumption?
Adam Smith says the world's wealth is not a fixed quantity / international trade increases general level or productivity within a country as well as increases world output.
Mercantilists
An advocate or practitioner of mercantilism, a national economic system in which a nation could regulate its domestic and international affairs so as to promote its own interests through a strong foreign trade sector. How a nation could regulate its domestic and international affairs to promote its own interests?
What benefits does Smith see for free trade for consumers?
allows for consumers to purchase goods for a better price because there are no tariffs or red tape between countries. Increase in welfare. http://www.economicshelp.org/trade/benefits_free_trade/
If one nation has a comparative advantage in one good then the other country must__________________________.
also have a comparative advantage because this advantage rests on relative prices.
Consequences of effective-rate calculation:
- Degree of effective protection increases as the value added by domestic producers declines - A tariff on imports used in production process reduces the level of effective protection
Nominal tariff rate
- Gives a general idea of the level of protection - Applies only to the total value of the final import product
Effective tariff rate
- Indicator of actual level of protection that a nominal tariff rate provides - Total increase in domestic productive activities in comparison with the occurrence under free-trade conditions - e: effective rate of protection - n: nominal tariff rate on the final product - a: ratio of the value of the imported input to the value of the final product - b: nominal tariff rate on the imported input formula: e = (n-ab) / (1 -a)
consumer surplus
- additional benefit obtained by the buyer of a good - difference between the maximum that the buyer is willing to pay and the actual price - area below demand and above price
producer surplus
- additional benefit obtained by the seller of a good - difference between the minimum that the seller is willing to accept and the actual price - area above supply and below price http://public.wsu.edu/~hallagan/EconS327/weeks/week4/Tariff.pdf
What were the costs of sugar program?
- import restrictions keep sugar at twice the world price - domestic sugar producers reap about $1 billion in 1998 as a result of this policy - 42% of benefits went to 1% of all producers - highly concentrated while costs are widely diffused. pg. 100
Specific Tariffs
A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff can vary according to the type of good imported. For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported.
When we think about countries like firms, a small country, when exposed to trade, would most likely act most like firms in:
A price taker market
Stolper Samuelson Theorem
An extension of the theory of factor price equalization, which states that the export of the product that embodies large amounts of relatively cheap, abundant resource makes this resource more scarce in the domestic market.
Transfer of Quota Rents / Import Quotas
BIG DEAL page 85 Definition: A governmental restriction on the quantities of a particular commodity that may be imported within a specific period of time, usually with the goal of protecting domestic producers of that commodity from foreign competition. - is a national loss because money is taken from consumers and handed to foreign exporters (in the form of higher markup) instead of the government (in the form of tax revenue) as would have happened if a tariff was imposed. - also distorts the incentives of the exporters, particularly in developing countries. When the US imposes an import quota, foreign governments are usually responsible for determining which exporters will be allowed to sell in the US market.
Hong Kong is relatively abundant in labor, while Canada is relatively abundant in capital. In both countries the production of shirts is relatively more labor intensive than the production of computers. According to the factor endowment theory, Hong Kong will have a(n):
Comparative advantage in the production of shirts
What advantages did the pilot TAA program have over the current program. Will it work?
Current problems: people are not incentivised to re-enter the job force, prolonging the process does not normally insure the worker to find a better labor market match. What the old one had in 2002: wage insurance, receive cash when you have a job, are over 50, and the new job pays less. There was incentive.
Stringent governmental regulations (e.g., air quality standards) imposed on domestic steel manufacturers tend to:
Detract from their competitiveness in the international market
A main advantage of specialization results from:
Economies of large-scale production
Which of the following suggests that by widening the market's size, international trade can permit longer production runs for manufacturers, which leads to increasing efficiency?
Economies of scale
According to the factor endowment model, countries heavily endowed with land will:
Export products that are land-intensive
Source of Comparative Advantage
Factor Endowments : In economics a country's factor endowment is commonly understood as the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing.
Start with the most basic argument, goods are being sold too cheaply. How are people winning arguments against this?
Goods are cheap so that increases consumption which means the demand for goods goes up which means there will be more production and jobs to service that demand.
In a two-country, two product world, the statement "Japan enjoys a comparative advantage over France in steel relative to bicycles" is equivalent to:
France having a comparative advantage over Japan in bicycles relative to steel
A product will be internationally traded as long as the pre-trade price differential between the trading partners is:
Greater than the cost of transporting it between them
Boeing aircraft company was able to cover its production costs of the first "jumbo jet" in the 1970s because Boeing could market it to several foreign airlines in addition to domestic airlines. This illustrates: -
How economies of scale make possible a larger variety of products in international trade
What is surprising about the bottom of page 80 and top of 81?
How specific some of these tariffs are. That there are many tariffs and yet 70% of the goods by value come into the country tariff free through free trade agreements.
Idea of the capital/labor ratio
If labour costs are high, firms will look to substitute capital for labour. For example, in Europe, waiters are equipped with mobile devices to send the order directly to kitchen. This is more efficient use of labour and so less is required. In countries with lower labour costs it may not be necessary or advisable to invest in the mobile order equipment, therefore, they will have a lower capital to labour ratio In the short term it is easier to vary labour than the capital stock. In recessions capital to labour ratios tend to be higher as firms get rid of workers.
What are the problems with Industrial Policy?
Industrial policy is seen as harmful as governments lack the required information, capabilities and incentives to successfully determine whether the benefits of promoting certain sectors above others exceeds the costs and in turn implement the policies Governments, in making decisions with regard to electoral or personal incentives, can be captured by vested interests, leading to industrial policy only supporting the rent-seeking political elite while distorting the efficient allocation of resources by market forces at the same time.
Say you believe in the "buy American" argument, what are the implications of this for other sectors?
It could cost jobs because it would cause us to produce products that we do not have a comparative advantage in.
What is the free rider program and what are MVTs?
It occurs when those who benefit from resources, goods, or services do not pay for them, which results in an under-provision of those goods or services. The potential for free riding exists when people are asked to voluntarily pay for a public good. MVT - The median voter theorem states that "a majority rule voting system will select the outcome most preferred by the median voter
Product life cycle theory
Many manufactured goods undergo a predictable trade cycle; during this cycle the home country initially is an exporter, then it loses its competitive advantage vis a vis its trading partners, and eventually may become an importer of the commodity.
Should the United States impose tariffs on foreign goods to prevent imports from low wage countries from harming American workers?
No because it can result in distorted trade and significantly higher prices for US consumers. This rise in price means less selling of product (due to a drop in demand) which means US workers will lose their jobs.
Are anti free trade policies good for governments, especially in LDCs?
No because it does allow the country to reap the benefits of international trade like technology, innovation, etc.
Does it make sense to retaliate in tariffs?
No because we are basically saying, oh another country has placed tariffs against us and, in doing so, has harmed their own economy...let's set our own tariffs against them so we can harm our domestic economy.
Immigration keeps people poor. It also means computer programming services take place over the internet. However, we don't see this completely working, why?
Not all labor is created equal. Tech is not equal everywhere. Not all capital is created equal. Transportation and trade barriers TURNS OUT ASSUMPTIONS MATTER
If we consider the impact on both consumers and producers, then protection of the steel industry is:
Not in the interest of the United States as a whole, but it might be in the interest of the state of Pennsylvania
In Irwin's worldview US automotive companies are competing with who?
Other non-automotive American industries
In a two-product, two-country world, international trade can lead to increases in:
Output of both products and consumer welfare in both countries
A problem encountered when implementing an "infant industry" tariff is that:
Political pressure may prevent the tariff's removal when the industry matures.
The most vocal political pressure for tariffs is generally made by:
Producers lobbying for import tariffs
Which trade theory suggests that a newly produced good, once exported, could ultimately end up being imported as the technology is transferred to lower- cost nations?
Product life cycle theory
The Ricardian model of comparative advantage is based on all of the following assumptions except:
Product quality varies among nations
The factor endowment theory assumes
Same tastes and preferences, b. Factor inputs of uniform quality, c. Same technology, d. All of the above
The gains from international trade increase as:
The international terms of trade rises above the nation's autarky price
International trade forces domestic firms to become more competitive in terms of:
The introduction of new products, Product design and quality, Product price
Studies have shown that there is an inverse relationship between
level of trade barriers and economic growth
Distorted incentives - sugar industry.
Subsidies can support industries which aren't efficient and pollute more!
Why Are Tariffs and Trade Barriers Used?
Tariffs are often created to protect infant industries and developing economies, but are also used by more advanced economies with developed industries. Here are five of the top reasons tariffs are used: Protecting Domestic Employment The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. Protecting Consumers A government may levy a tariff on products that it feels could endanger its population. For example, South Korea may place a tariff on imported beef from the United States if it thinks that the goods could be tainted with disease. Infant Industries National Security Barriers are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Retaliation Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. For example, if France believes that the United States has allowed its wine producers to call its domestically produced sparkling wines "Champagne" (a name specific to the Champagne region of France) for too long, it may levy a tariff on imported meat from the United States.
Just back to SRATC and LRATC
The Short-Run: In microeconomics, we define the short-run as the period of time over which a firm's plant size is fixed. The only variable resource is labor and raw materials, meaning that when demand increases for a firm's product, the firm is able to increase employee work hours, hire more workers and use existing capital more intensively, but it does not have the time to acquire new capital or expand factory size. Likewise, when demand falls for a firm's products, it can cut back on work hours, fire workers, but cannot downsize its plants or factories. The Long-Run: The long-run is defined as the variable-plant period. A firm can adjust the number of all its inputs: land, labor and capital. One way of thinking about the difference between the short-run and the long-run is imagining the long-run as several different short-runs spread out over a larger range of output.
Considering Figure 3.1 which of the following would be true
The US is relatively capital abundant and China is relatively labor abundant.
Inter industry trade
The exchange between nations of products of different industries.
Intra industry specialization
The focus on the production of a particular product or groups of products within a given industry.
The argument of the foreign exchange market
The foreign exchange market is one of several markets that links exports and imports insuring that a country's exports increase when it unilaterally reduces its own import tariffs. That would not exist without the foreign currency markets.
When a tariff on imported inputs exceeds that on the finished good,
The nominal tariff rate on the finished product would tend to overstate its protective effect
Leontief paradox -
The phenomenon of exports being less capital intensive than import competing goods. Surprisingly, the world is complex. Thanks Leontief.
Under free trade, Canada would not enjoy any gains from trade with Sweden if Canada:
Trades at the Canadian rate of transformation
Intra industry trade
Two way trade in a similar commodity.
complete specialization
a situation in which a country produces only one good
Inter industry specialization
When each nation specializes in a particular industry in which it enjoys a comparative advantage.
production possibility schedule
a schedule that shows the various production possibilities of two goods that a nation can produce when all of its factor inputs are used in their most efficient manner
.Refer to Exhibit 4.1. In the absence of the Offshore Assembly Provision of U.S. tariff policy, the price of an imported vehicle to the U.S. consumer after the tariff has been levied is:
c. $24,000
Referring to Figure 2.1, the relative cost of steel in terms of aluminum is:
c. 0.5 tons
A closed economy is one in which:
c. The home economy is isolated from foreign trade
In Figure 2.4 the marginal rate of transformation of autos into wheat is
c. three fifths
What did Vilfredo Pareto talk about?
concentrated benefits, dispersed costs "a protectionist measure provides large benefits to a small amount of people a causes a very large number of consumers a slight loss" - benefits of trade production are highly concentrated while costs are widely diffused.
Refer to Table 2.2. With international trade, what would be the maximum amount of steel that South Korea would be willing to export to Japan in exchange for each VCR
d. 2 tons of steel
price specie flow doctrine
david homes theory that a favorable trade balance was possible only in the short term, it would automatically be eliminated via changes in product prices
If you are an industry that doesn't have a comparative advantage, the demand for your good/service/resource will _____________________ with international trade and ________
decline with international trade, effectively making you "worse" off. It should be noted these gains are offset, and you are just worse off COMPARED to where you started from.
tariff avoidance
legal method of reducing or eliminating the amount paid in tariffs example: Brazilian raw sugar shipped to Caribbean and refined there into ethanol then imported to the U.S. duty free
partial specialization
when a country specializes only partially in the production of at the good in which it has a comparative advantage
outsourcing
when certain aspects of products manufacture are performed in more than one country
increasing opportunity costs
when each additional unit of one good produced requires the sacrifice of increasing amounts of the other good
How has lots of capital flowed into the US?
- OPEC recycled many of their oil dollars by investing in US financial markets in the 70s pg. 12 - 80s Japan and other countries with trade surpluses with the US acquired US financial assets, businesses, and real estate. - International banking
Gains from Trade
- Increased competition deters monopoly - More innovation - Wider range of product choices - Harmony of national interests pg. 59
LDCs during the last wave of globalization
- LDCs had a variety of economic and political issues causes them to be poor places to invest, thus you are unlikely to see growth in these areas. - China, Brazil, and India arrive on the world market. - The book makes the claim LDCs suffer from increasing inequality. Unclear to me. Warrants further investigation, good paper topic. - Some LCDs were able to take advantage of their cheap labor for manufacturing. - Digital platforms, etc.
What changed to allow for this increase in globalization?
- Massive reduction in shipping costs. (Is there a moral case for fossil fuels?) - Massive improvements in communications. - Tariffs which used to be in the double digits are down to the single digits! - Many quotas have been removed! Yay! - Lower trade barriers, better financial markets (home and abroad), have encouraged companies to globalize their production abroad.
Ricardo made a bunch of simplifying assumptions... that don't reflect the real world. Page 34.
- The simple theory of comparative advantage outlined above makes a number of important assumptions: - There are no transport costs. - Costs are constant and there are no economies of scale. - There are only two economies producing two goods. - The theory assumes that traded goods are homogeneous (ie identical). - Factors of production are assumed to be perfectly mobile. - There are no tariffs or other trade barriers. - There is perfect knowledge, so that all buyers and sellers know where the cheapest goods can be found internationally. http://iang.org/free_banking/david.html
Page 33 Adam Smith and Specialization
- economic liberty (free trade is important to this system) - Adam Smith - Free trade benefits are more than simply the arbitrage exchange - trade would increase competition on the home market - wealth of any society depends on the division of labor, the degree to which individuals specialize in certain tasks, enhances productivity. - division of labor is limited to the extent of the market. - smaller markets cannot support a high degree of specialization - trade allows these small poor countries to extend the effective size of their market and have a more refined division of labor, and then reap a higher real income.
Kodak - Creative destruction.
- had a monopoly of the photo equipment and it made the bosses complacent and unaccepting of new tech. - Fuji came in with cheaper products but Kodak thought that no american would buy japanese but fuji got an olympics deal that made them viewed by the world and americans started buying in - Kodak also declined due to ride in digital cameras and smartphones. - they rose again through digital cameras but did not realize how fast others could catch up or how quickly the commodity was evolving and they fell behind again when other asian companies began producing cheaper, more innovative cameras. - example of industrial giant that altered in the face of global competition. Pg. 16
Morally, are there implications with globalization?
- labor laws and environmental conditions - brain drain - globalization makes the rich richer and the poor poorer. It takes from the poor to the rich-Robin Hood in reverse.
Real world doesn't match examples of comparative advantage. - where does it fail?
- there could be no comparative advantage (relatively equal) - we are not all creating one homogeneous good (people want different things) - quality (people will pay more for it) - production possibilities curves
The path/connection of this interdependence...
... is not always clear, knowable, or predictable!
What percent of American consumption expenditures is devoted to Chinese goods? Page 24
1.2%
Constant Opportunity Costs - Realistic?
A constant rate of sacrifice of one good for another as a nation slides alongs its PPS A steady potential price to a business that occurs when a company does not take advantage of a feasible chance to earn profits. An example of a constant opportunity cost would be if funds and resources were allocated to one project, but could have been allocated to a second project instead. The opportunity cost would be the potential value of the second project to the company. It can answer to the question, what is the basis for trade, and in which direction should trade occur.
(Fallacies) Unemployment. What is the flip side of this?
An increase in trade often leads to an increase in jobs. for example if the US accepts computer tech. from germany then technically our sales, output, and jobs suffer but if germany sales to the united states increase, they have more purchasing power, and in return will buy more computer software, output and employment will then increase again. drag of imports is often offset by the stimulus of economy caused by rising exports. pg. 18
How has the last wave of globalization affected products?
Companies no longer focused on producing a finished product, but are just involved in a stage of production.
Comparative Advantage
Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors. The law of comparative advantage is popularly attributed to English political economist David Ricardo and his book "Principles of Political Economy and Taxation" in 1817, although it is likely that Ricardo's mentor James Mill originated the analysis. One of the most important concepts in economic theory, comparative advantage lays out the case that all actors, at all times, can mutually benefit from cooperation and voluntary trade. It is also a foundational principle in the theory of international trade.
You can only project jobs at the cost of who?
Consumers
Price specie flow doctrine
David Hume's theory that favorable trade balance was only possible in the short term, and that over time, it would automatically be eliminated via changes in product prices.
Reasons we have low cost and reliable transportation (2 biggies)
Diesel and natural gas are two HUGE reasons we can have low cost / reliable transportation. Important to realize the impact these two have in the positive direction on the standard of living of BILLIONS of people. pg. 8
Does exporting more than you import make sense on an individual level (think mercantilism view)?
Discourages importing / government can impose tariffs / encouraging exports / rise in domestic output and employment / static view of world economy / zero sum gain No, think about if all u did is hoard money and never gave it to anyone else
Question - Can you think of any current US policies which impact foreign nations? Moral implications of this? Unintended consequences of this?
Due to an increase in globalization I would argue that almost all of our domestic and foreign policies affect the world at large. Whether we go to war, decided to make Puerto Rico the 51 state, end our embargo with Cuba, decide to stop taking refugees, increase our minimum wage, or elect a new president. It all effects foreign nations. This impact can be small, like a subtle shift US currency, or it can be incredibly impactful because we outsource so much of our labor and goods that a shift in policy could effect the daily life of millions of people around the world. A great example would a shift in our policy on sweatshops. (Think of the book you read - Out of Poverty). - People try to stop sweatshops by not buying sweatshop goods - still causes people abroad to lose their jobs - should be trying to get competition through more sweatshops
If you doubt free trade, why do you doubt it?
Economic Arguments Against Free Trade: - Retrogrades industrialization (The argument that a country could get locked into serving the needs of the world market in raw materials, and therefore not develop industrially) - Trade Requires More Resources to Distribute (Delivering food produced on the other side of the world to a supermarket has an environmental impact because it requires the use of fossil fuel in delivery from overseas, as compared to local delivery. In a perfectly efficient market, the costs of the fossil fuel would include the externalities associated with their consumption. Thus the full impact of their transportation costs would be reflected in the market price of the good. In the real world, there are no perfectly efficient markets. Much of the true costs of transporting goods around the world and consuming fossil fuel must be paid in the future dealing with the health and environmental effects of pollution. It is also likely that economic disruptions will be caused by future shortages of fossil fuel energy and spikes in fuel prices since it is a finite resource that is being depleted.) Social / Political Arguments: - Free Trade Undermines Cultural Diversity (Throughout the world, forces that many blame on free trade are eroding traditional ways of living and rural cultures) - Dependency Theory
Can you export more than you import, is this a good goal? Export more than you import.
Example: England creates a trade surplus that results an inflow of gold and silver. Because the metals are part of England's money supply, their inflow increases the amount of money in circulation. This leads to a rise in England's price level relative to that of its trading partners. English residents would then be encouraged to purchase foreign-produced goods, while England's exports would decline. As a result the country's trade surplus would eventually be eliminated. SO, if it is a goal, it may only work as a short term one at best.
Waves of Globalization
First Wave 1870-1914 - Decrease in tariff barriers and new tech in transportation. Driven by America/Europe. Exports as a share of world income nearly doubled to 8%. Per capita incomes rose by 1.3% compared to .5% during the previous 50 years! WW1 and then the Great Depression brought about tariffs and we saw a decrease in international trade. Second Wave 1945-1980 - Again transportation costs & lower tariffs boosted trade. Tariffs were largely reduced in manufacturing/developed countries, but weren't nearly as much in agriculture/LDCs. Latest Wave 1980 - developing countries (like BRIC) broke into the world markets, other developing countries became increasingly marginalized, significant international capital movements.
What advances in shipping lead to growth in international trade? Pg 21
First in the late nineteenth century: Steam ships Late 1960's: Container shipping containerization led to an increase in labor port productivity (tons moved per hour) and there was an increase in ship size. increased trade in developed countries by 700% in 20 years.
What is the difference between free trade and fair trade?
Free trade refers to a general openness to exchange goods and information between and among nations with few-to-no barriers-to-trade. Fair trade refers to exchanges, the terms of which meet the demands of justice. Fair trade organizations, such as the Fair Trade Federation and the International Federation for Alternative Trade maintain that fair trade practices alleviate poverty, enhance gender equity, improve working conditions, the environment, and distributive justice. By contrast, free trade proponents believe that under a system of voluntary exchange, the demands of justice are met. Although free traders hope to alleviate poverty and improve conditions around the world, they prefer measures that are less intrusive than fair traders, who regard the unfettered market as injurious to these same goals. In general, economists recognize that free trade provides the least amount of overhead during the production of goods and services, so a free trade economist will emphasize the lower end-price for consumers that results from trade policies that do not have government-mandated price minimums. However, some economists believe that fair trade policies help to add more consumers to an economy and that the additional price for "fair" labor is outweighed by the net economic benefit that comes from adding more consumers with disposable wages into the marketplace.
Table 1.1
Fruits of free trade, a global fruit basket (where we get/who supplies the most of the world's fruits).
What are some issues with GDP?
GDP doesn't take into account the level of debt a country has. For example, Japan has the fourth highest GDP in the world behind the EU, US and China (in that order) and yet it has the highest debt to GDP ration in the world. GDP also doesn't take into account the cost a country pays to service their debt. GDP also doesn't take into account the risk of public policy changing to make foreign investment more risky e.g. government seizing private property or funds. It also doesn't take into account the level of poverty (e.g. India, 10th by GDP). It also doesn't take into account the level of corruption in a country e.g. Russia is 11th by GDP and in the top 20 most corrupt countries in the world.
(Fallacies) Zero sum game. What is one thing we know from micro?
Game theory in which one person's gain is equivalent to another's loss, so the net change in wealth or benefit is zero. A zero-sum game may have as few as two players, or millions of participants.
Smith observes "policymakers too frequently equated the interests of producers with the interests of the nation as a whole." Why might this be the case? Smith points out this confuses the means with the end. What does he mean by this?
He believed that they were attempting to promote national wealth by endorsing anything that increased producer output (even if that meant limits on imports or restrictions on competition). He then said this did very little for the nation as a whole because it would not expand total output and divert resources to less productive uses. He explains that the interest of the producer should only be promoted if it also benefits the consumer. He means that this system considers production and not consumption as the end and object of all industry and commerce.
How would you define free trade?
I define free trade as the most open form of trade between countries so that they can exchange goods and services without red tape.
Cigarette paragraph - Do you really care? Is this economic policy or telling people how to live?
I think its ethical policies steeped in the guise of economic policy.
Why do people value "Made In America"? What does that even mean?
I think that people value "made in america" because they believe that every aspect of the product they are buying is made within the US. Sadly, the term has lost much of its backing in the last wave of globalization due to an increase in global supply chains where parts are made elsewhere and then imported here, and assembled. There are over 40 pages in FTC rules that regulate what it means to be made in america but honestly...if you're buying a product that is "MIA" its most likely not ALL MIA
Question: At what level do you think you could be "independent" and maintain a reasonable standard of living (whatever that means for you)?
Id have to always balance consumption with production...which is hard to say the least.
What practical reason does Irwin suggest for those with higher education being in support of free trade? Do you agree? Page 27
Individuals with less education are more likely to be employed in sectors that compete against imports and have greater difficulty reemployed once displaced compared to those with a higher education. Yes, and no. I believe that this "less educated" group is much more active / outspoken about their disapproval of free trade because it directly effects them, but I do not believe that all those who have higher education believe in free trade. In fact, I would say that it is people with multiple degrees and titles that are constantly weighing the effects of free trade and its impact on the world. Yes, it is accepted by them but that does not always mean they wholeheartedly support it.
What does vertical specialization mean for products "made in the USA"?
It means that only a small percent of them may have actually been made in the U.S. In fact it may only be the very last part, even though the rest was created and or manufactured outside of the United States.
What is a Production Possibilities Schedule?
It shows various alternative combinations of two goods that a nation can produce when all of its factor inputs are used in their most efficient manner. Assuming things like full and efficient use of all resources. Any point inside the schedule is inefficient, anything outside the schedule is not possible.
Are we more or less likely to go to war with a country we trade heavily with?
Less likely, Nations form a web of trading alliances, which creates financial incentive not only to keep peace with trading partners, but also to protect them from being attacked so as not to disrupt trade.
John Stuart Mill - 3 Advantages of trade - What were they?
Mills three principal gains from trade: 1) direct economic advantages of foreign trade, 2) indirect effects, and 3) the economical benefits of commerce are surpassed in importance by those of its effects which are intellectual and moral. 1 explained = standard gains that arise from specialization (Japan, US, and Israel example pg. 45) Direct economic benefits. Specialization. More competition for consumer dollars, more choice, great quote on page 48 about oranges. Under calculation of beenfits from quality of goods. 2 explained = the tendency of every extension of the market to improve the process of production. Indirect // Productivity gains. Ideas can spread, efficient firms can grow/expand to levels of output they previously couldn't. Hard to measure these effects, as it is hard to measure "trade policy". Page 59, just how we want good to be mobile, we also want capital, labor, and ideas to be mobile. They are all resources. 3 explained: commerce cures destructive prejudices. trade promotes peace among nations. Intercultural & Moral. I'd consider this cultural. Footnote 56 on page 59. Quote on 60 regarding social norms from fast food chains.
What is division of labor? Examples?
Narrow specialization of tasks within a production process so that each worker can become a specialist in doing one thing, especially on an assembly line. In traditional industries, division of labor is a major motive force for economic-growth. However, in the era of mass customization (which requires multiple skills and very short machine change-over time), division of labor has become much more flexible. Also called specialization of labor. Why is division of labor more efficient? - Workers need less training as they only have to master a small number of tasks - It is faster to use one particular tool and do one job. - No time is wasted with a worker dropping a tool and then picking up another, every time he needs to moved onto a new item. - There is no need to move around the factory, the work can be brought to the worker. - Workers can concentrate on those jobs which best suit their skills. Examples of division of labor: Ford motor factories. In the 1920s, H.Ford made use of the assembly line to increase the productivity of producing motor cars. On the assembly line, there was division of labour with workers concentrating on particular jobs. Food production. A very basic example of division of labour could be seen in food gathering. In early societies, men would be the hunters, women and children would prepare the food and collect berries. The idea was that it was a very simple division of labour to enable the best use of different skill sets.
Labor might be cheapest in Country X, but does that mean medical services will be produced there?
No because labor is only one factor and cheap, unskilled labor is not the only factor needed.
Are a large percentage of American workers exposed to competition in the goods producing sectors (mining and manufacturing)?
No! Only 9%! Down from 26%. However more goods/services being traded today than before.
Is labor just as mobile as capital?
No, for the US labor was not as mobile because the flow of immigrants was not steady or free-flowing. So, if labor could move through borders as quickly or flawlessly as capital could, then they would be more equal.Pg. 12
Productivity can differ in different places. Land might be cheaper in Michigan, but does that mean it will be the cheapest place to produce oranges?
No, think production possibilities schedule and MRT. No because land is only one factor or cost in producing oranges.
Question - Do countries really trade?
No? Trading, to me, gives the sense of a barter system. Trade is the exchange of goods and services. We do not give China cars and get phones in return.
Does trade promote or reduce peace? Which comes first?
Pg. 61 Many believe there is a positive trend between trade and peace. Increased bilateral trade = increase in cost of conflict. trade promotes democracy, democracy promotes peace.
What is the idea of diminishing international trade? Arguments for, and against? Page 11.
Spread of Industrial technology around the world will lead to smaller differences in industrial efficiency across countries. Each country would eventually come to produce manufactured goods just as efficiently as any other. For: - trade share would fall as countries grew richer because the composition of demand would shift away from traded goods towards non-traded goods Against: - division of labor in manufacturing has become more refined and has increased trade even between countries with comparable technologies. Increased trade + technology = more specialization (think cars)
"When the US sneezes, the economies of other nations catch a cold." Question - Is this good news for Americans? Other people around the world? Morally do you care about this answer?
The US is the biggest consumer so if our consumption goes down (like it does during a recession) it effects everybody. This, categorizes us as the largest consumer, so in some ways it is inherently good that we have so much control over the market. Similarly, this also categorizes other countries as entities that just rotate around the source, like planets around a sun. In time of recession this is inherently bad for their economies and welfare, but in times of economic prosperity that means there is more of chance that other countries have the ability to benefit from the USs gain as well. Morally, this is a bit vexing due to the fact that it once again places the US in control of others.
Protectionism: Economics Costs
The effects of protectionism, for economic theory, are clear and multiple. Protectionism requires resources (e.g. tax revenue) which are taken away from other industries, the output of which consequently falls. It also takes resources away from individuals and households, who face higher prices for the protected goods: as a consequence both their consumption of that good and their overall consumption fall, in the latter case because of reduced purchasing power. Output in the competitors' states is also reduced as a result of the reduction of sales in the protected country. More generally, uncertainty in trade policies undermines growth in itself, for firms are unsure about how much to invest and when in case of higher future barriers. Many studies have shown the (high) costs of protectionism. Some also have found that increased imports do not cause higher unemployment and that trade restrictions do not create greater employment. It is even possible that a reduction in imports, by reducing foreign incomes, reduces demand for exports and thus in turn reduces the domestic incomes of the protectionist country. Others have shown that the costs of protecting local jobs and firms through tariffs and quotas are greater than the cost of retraining workers and relocating jobs. Similarly, the costs of subsidies are likely to be higher than the costs of shifting production to more competitive industries. Tariffs, quotas and subsidies are also believed to discourage innovation and advancement in domestic industries, which do not face the incentives of competition to lower their costs and improve the efficiency of their production process.
Smith quote page 31, "All commerce that is carried on betwixt any two countries must necessarily be advantageous to both" Question - Is this true? Why is Smith saying this?
The very intention of commerce is to exchange your own commodities for others which you think will be more convenient for you. I believe that in most cases of trade, it is very much true. Every country favors their own interests and when trading is on equal grounds, I do believe that, due to both countries being representative in their self interests, the outcome of the trade will in fact be advantageous to both parties.
Does vertical specialization impact trade deficits? Page 19
Trade deficits can become overstated or understated, like between the US and China. The US imported iPhone from China at a unit cost of $179, which added 1.9 billion to the recorded US trade deficit. Yet the assembly cost in China was only $6.50 per unit, roughly 3.6% of the unit cost but US stats. attribute the entire unit cost to China because that is where the product arrived and entered the united states. This makes our trade deficit with China overstated.
Ricardo was plagued by a question, what was it?
What if one country was the most efficient at producing everything? Would that country still benefit from trade? Would disadvantaged countries find themselves unable to trade at all.
The US domestic policy exerts a large influence around the world. The dollar is considered one of the most stable currencies. Consider the most recent financial crisis, in which the Fed carried out a massive expansionary monetary policy. This devalued the US dollar relative to foreign currencies. Question - If you are a foreign bank/government/investor, does this excite you?
When we flood the market with dollars and the dollar devalues when the dollar goes down our exports become cheaper and imports become more expensive. So yes, because the dollar is more stable you can purchase dollars for less (the exchange is less). Economically if the dollar is weak, people, buy them, they are a safe haven currency.
(Fallacies) We don't only import, we also export, what do tariffs/quotas do to our ability to trade/sell goods?
When we reduce country's abilities to export to us we also take away their ability to obtain dollars that are required to import from us. Trade restrictions that decrease the volume imports will also decrease exports. As a result, jobs promoted by import barriers tend to be offset by jobs lost due to failing exports.
