Macroeconomics Module 15

movement of resources

1 if trading countries benefit from the flow of goods and services, what about benefits from the flow of inputs 2. labor, capital, and raw materials also move between countries 3. in general, the movement of inputs of goods between countries can be a substitute for the free movement of finished goods 4. if a country is poor in raw materials, capital, or skilled labor, it has two options: -it can import goods that incorporate large quantities of those inputs -it can import those inputs and produce its own final products -both would be beneficial -in the absence of artificial barriers, market considerations determine which choice is more efficient-to move the final product or to move the input

Foreign Direct Investment

1. Foreign Direct Investment (FDI): investment made by a company or entity based in one country into a company or entity based in another country 2. According to the Organization for Economic Cooperation and Development, the acceptable threshold for a FDI relationship is 10% -that is, the foreign investor should own 10% or more of the voting stock or shares of the foreign company to establish a controlling interest 3. the United States welcomes FDI and gives tax credits and subsidies to foreign companies that create jobs in various states -for example, BMW builds a car factory in Spartanburg, South Carolina, this causes other companies (such as BMW's top suppliers) to also relocate there, thus revitalizing the community 4. however, depending on the country doing the investing there may be national security concerns -for example, a Chinese company owns the Astoria NYC, NY. The Waldorf Astoria has been where US presidents and other US officials stayed when addressing or working at the United Nations. In 2015, the US government stopped using the hotel as the base due to security concerns 5. In developing countries, FDI can bring needed capital, expertise, and technology 6. Since FDI is done privately, it is a way for countries to grow without having to deal with other governments -those businesses can create income, which creates tax revenue, which can support infrastructure projects 7. despite this type of capitalism having a track record of success, developing countries might oppose this form of investment, as they feel it gives foreigners too much control over their country

Immigration introduction

1. Mexico has been the leading source of new US residents 2. immigration policy has been a source of much debate in the United States 3. This increased pattern of immigration, along with an aging population, has led to a shifting demographic for the labor force -one of the major shifts is in the racial and ethnic makeup of the labor market; it will become much more diverse than it is now 4. organized labor has generally opposed raising or eliminating immigration quotas because it wants to protect jobs for US citizens -however, owners of small manufacturing firms, large-scale farms, hotel chains, and other service establishments, and professionals in need of household help and child care like immigrants because they are willing to work long hours for low wages 5. people who immigrate illegally not just to the US but to Europe and Australia, tend to have less education and skills than people who immigrate legally

trade barriers introduction

1. a country's commercial policy is a set of actions that it undertakes to deliberately influence trade in goods and services 2. for most of its history, the United States has had high tariffs and other trade restrictions (highest being the Smoot-Hawley tariff Act of 1930--at an average charge of 53%; may have been one of the principal causes of the Great Depression)

Quota

1. a quantity limit -it specifies the maximum amount of a good or service that can be imported during a given time period (usually a year) 2. quotas can be global: limiting total imports from all foreign suppliers to a quantity/ year 3. quotas can be geographic: assigning quotas to specific countries

tariff quota

1. a quota can also be combined with a tariff -in this case, a certain amount of a good from one country is allowed to enter another country without a tariff. For amounts in excess of that limit, a tariff is applied

tariff

1. a tax on imported goods or services 2. can be specific: based on weight, volume, or number of units 3. ad valorem: figured as a percentage of the price 4. the average US tariff is less than 3% -many items bear no tariffs at all, and few items have large tariffs

non-tariff barrier: antidumping

1. an important non-tariff barrier is antidumping codes 2. dumping consists of selling a good at a lower price in a foreign country than in the firm's home country 3. firms may dump abroad to get rid of surpluses, to take advantage of differences in elasticity of demand (price discrimination) or to establish a foot hold in a competitive market 4. most countries, including the United States, have antidumping regulations that forbid this practice as unfair competition 5. if a foreign firm is accused of dumping (usually by a competing firm in the importing country), the International Trade Commission will hear the case and may impose a duty on the dumped goods to counteract the price difference 6. a well known dispute is the Canada-United States Softwood Lumber dispute -it began in 2001 and lasted until the final ruling in 2009; the Agreement to Extend the Softwood Lumber Agreement to October 2015 was ratified as of 2012 7. Reduction in other trade barriers, both through negotiated tariff reductions and formation of free trade areas, means that domestic producers increasingly turn to claims of dumping, valid or not, as their last defense against foreign competition

effects of a tariff or quota

1. at the world price, Pw, producers are producing A and consumers are demanding B. Imports = B-A 2. the domestic supply curve is Sd 3. the domestic demand curve is Dd 4. the difference between production and consumption is imports = B-A 5. Pt = price after tariff = T 6. can supply more and domestic producers get a larger share of the market -consumers demand less as the price raises 7. new imports is C-E

What do economists prefer?

1. because it is believed to be the most efficient policy, most economists prefer a policy of free trade to either tariffs or quotas 2. if they have to choose, they usually consider a tariff less harmful in terms of efficiency than an equivalent quota -first, a tariff allows imports to increase in response to increases in demand -also at least some of the tariff revenue goes to the government, which uses it further for the general welfare -because a quota is less obvious, it is more likely to remain in place indefinitely

the sources of comparative advantage

1. climate, mineral resources 2. for many products, economies of scale are an important factor in being able to compete in a global market 3. scale economies are especially important for large durable goods such as main frame computers, aircraft, and heavy machinery -consumers also benefit from economies of scale because lower costs mean lower prices 4. some products use a high proportion of unskilled labor relative to capital and other inputs -these products will be produced in countries with relatively large amounts of low-cost, unskilled labor. -other products require relatively more skilled labor: capital, or fertile land. These products will be produced in countries where those resources are more abundant 5. regardless of the source of comparative advantage, the important point is that it is possible for both partners to increase output and reduce prices to consumers by specializing on the basis of comparative advantage

benefits of free trade

1. creates value 2. one of the biggest benefits increased consumption -trading allows people, businesses, and countries to consume beyond their production possibilities curve 3. increased competition -trade increases the number of competing firms from whom consumers can buy, widening their range of choices of goods and suppliers -this benefit of trade can be very important if the domestic industry has only a few firms 4. lowers costs through economies of scale -economies of scale is where the average total cost lowers as the quantity produced increases. trade will expand the number of customers, thereby lowering a firm's costs 5. enhanced flow of ideas

Who loses with a tariff/quota

1. domestic consumers are paying more for less 2. foreign producers have lost sales 3. also, the country imposing the tariff has given up some benefits of free trade noted earlier--more output, competition, and economies of scale -the country switches from more efficient to less efficient producers when there are restrictions to trade

Who gains with a tariff/quota

1. domestic producers, including their owners, workers, and suppliers -these firms can charge a higher priced and have a larger share, which benefits everyone connected to them 2. the government also gains in the form of tariff revenue

Differences between tariffs and quotas

1. first, a tariff raises revenue for the government while a quota generates no government revenue 2. all the benefits of a quota go to protected domestic producers and to those importers who manage to get the scarce and valuable import permits used to implement quotas -permit holders can buy the good at the low foreign price and resell it at the higher domestic price -the difference between the price the importer pays the foreign supplier and the price the importer can charge the domestic consumer (Pt-Pw) times the number of units imported is a monopoly profit that comes from having a license to import -note: this monopoly profit is equal to the revenue the government would have received under a tariff 3. second, suppose demand increased in the country -with a tariff, the quantity of imports would increase -with a quota, only the price would increase -originally, the tariff (T) and the quota (C-E) had the same effect on prices and quantities -as Figure 17.3 shows, however, when demand shifts from Dd to Ddt under a tariff, imports rise to H-E and consumption rises to H -with a quota, the price rises to Pf. Imports remain the same (C-E becomes G-F). domestic production rises to Ft and consumption rises slightly to G

disadvantageous for low skilled US workers

1. illegal immigrants, for the most part, find a low wage, unskilled job in the US, which is a significant improvement over the situation they left behind 2. disadvantageous for low skilled US workers as the immigrants provide a large supply of people willing to work for less than American Citizens or legal residents -without this competition, wages in low skilled jobs would be higher 3. most often the American worker leaves the labor force and has to go on government assistance because these programs provide more income than than the low-skilled job filled by an immigrant

when unskilled workers migrate to the United States

1. in general, when unskilled workers migrate to the United States or other industrial countries, the owners of capital or firms in the receiving country and the skilled workers in the receiving country benefit 2. these two groups will experience higher returns to their past investment in physical and human capital because unskilled labor is complementary to these other productive resources 3. unskilled workers in the receiving country are hurt because they face increased competition for jobs and from people who are often willing to work for less

1. Why nations trade

1. it is important to realize that in most cases, international trade takes place between individuals and firms 2. trade takes place because of the availability of a better product or price or because of an opportunity for profit 3. before Adam Smith, the dominant view was that government should direct many spheres of economic activity, especially international trade--view is mercantilism which put heavy emphasis on controlling shipping, maintaining colonies, discouraging imports, and promoting exports 4. two famous economists are responsible for developing the arguments for a policy of free trade: -Adam Smith's wealth of nations in 1776 made a strong case for freedom in every sphere of economic activity -David Ricardo, a 19th century British economist and member of parliament, was very interested in the practical question of what trade policy the UK should pursue--developed the principle of comparative advantage in his classic 1817 book "on the principles of political economy and taxation 5. it is easier to envision the processes at work in international trade by focusing first on exchange rather than production 6. economist who look at international trade emphasize the gains from trade, or the higher level of economic well-being that comes partly from greater production when nations specialize and partly from mutually beneficial exchange 7. while people do occasionally trade out of stock most of the time they produce in order to trade 8. the explanation of how people and nations decide what to produce for trade based on the concepts of absolute advantage and comparative advantage

Absolute Advantage

1. it is not difficult to convince anyone of the benefits of specialization and trade when there is a clear absolute advantage for each partner

costs of free trade

1. jobs in specific industries are lost (structural unemployment); jobs in nonspecialized areas are lost -the lost jobs, in general are due to outsourcing 2. non-tradable jobs: these are usually service jobs, like plumbing. It is not possible to outsource a plumber -the government jobs are also in this category -for this group, there are no costs to trade; only the benefits of lower prices and more selection 3. tradable jobs in areas of competitive advantage -there will be an increase of jobs in this area -the increase in demand leads to higher wages and salaries -not only will this group benefit by more demand for their services, but the people in this group will also benefit from lower prices and a greater selection of goods 4. tradable jobs in non-competitive advantage areas: this group bears the costs, as they will lose their jobs -however, they will gain from lower prices and a greater selection of goods

Quota forms

1. limit the physical quantity or the value fo the product imported 2. combined with a tariff 3. may be negotiated with the exporting country on a "voluntary" basis in the form of voluntary export restraints (VER) -one of the best known historical examples of VER was on auto exports to the United States from Japan after 1981

non-tariff barriers to trade

1. nontariff barriers: domestic laws or policies other than tariffs and quotas that interfere with the free exchange of goods and services across national borders

objections to movement of resources

1. objections may arise from those who are threatened by foreign competition 2. foreign competition is unpopular with the owners of productive resources, whether the competitions is in product markets or in resource markets -thus, these owners seek restrictions on the movement of resources as well as on the movement of goods 3. organized labor, for example, opposes immigration of workers and construction of plants abroad -newly arrived workers compete for jobs and depress wages -an offshore plant of a US firm means more jobs for foreign workers and fewer jobs for US workers 4. Domestic firms oppose letting their foreign competitors locate inside the country with no tariff wall for protection 5. emotional and political arguments are sometimes stronger than economic concerns. -many US citizens are unhappy about the purchase of US banks, farmland, and resort islands by foreign firms and individuals, even when there are no obvious adverse consequences

immigration effects

1. often times, immigrants send a great deal of their income home to their families in their origin country: remittances -this was larger than official development aid and is considered a massive poverty-alleviation program although not one that leads to economic development 2. finally, if the migrants are more productive in the new country than the old one (and, if these gains are not eaten up in the costs of getting the worker there and overcoming the cultural gap), the world as a whole may enjoy a higher standard of living, as long as the immigrants took jobs that would not have otherwise been done, or if the workers the immigrants replaced found work elsewhere 3. if workers in the receiving country stopped working, the gains from immigration for the world might not occur

non-tariff barrier: laws or regulations

1. other non-tariff barriers are laws or regulations enacted for domestic reasons that make it more difficult for foreign suppliers to compete -requiring excess paper work that adds to costs and reduces profits for foreign suppliers and domestic importing firms -in some countries, a shortage of customs inspectors constitutes a non-tariff barrier because it creates long delays and thus discourages imports 2. sometimes non-tariff barriers work the other way -some US laws and regulations make it more difficult for domestic firms to sell abroad -if US products must meet higher safety standards then it may make it more difficult

non-tariff barrier: intentional

1. some are intentional -ex. domestic preference laws (known in formally as "Buy American" in the United States) -these laws require the government to favor domestic suppliers when making purchases for government agencies and programs

comparative advantage

1. suppose one partner has an absolute advantage in both -you can still make something cheaper than anyone else when measuring opportunity cost 2. they can increase their productivity by specializing on the basis of comparative advantage -they have produced the same output with less input -both parties gained from specialization 3. the same principles that determine specialization of two individuals in simple situations apply to more complex situations involving individuals and firms in groups, regions, or nations -trade between nations is also based on comparative advantage by specializing, both parties can gain from trade 4. countries specialize in the good for which they have the lowest opportunity cost -a country cannot have a comparative advantage in both goods -it's only after trade the countries are better off

common arguments against free trade: cultural heritage

1. the cultural heritage argument is that there is a product that is so much a part of the country's culture and heritage that it would harm the country if it was made elsewhere 2. ex. Japan and rice -has many programs protecting rice farming from foreign competition -although the US has a comparative advantage in rice production, it imports very little 3. this argument is seldom used in the United States because of how large and diverse the country is

common arguments against free trade: jobs

1. the jobs argument is the one most often used, as well as the one that makes new most often 2. the job losses are more centralized (one factory firing hundreds) rather than the decentralized jobs created through free trade that are scattered 3. also don't want to support unfair labor practices

Effects of a Quota

1. the main difference is that quotas restrict quantity, and tariffs work through prices 2. if in the above figure, the government imposed a quota in the amount of C-E, the effects on price, domestic production, consumption, and imports would be the same as those of the tariff, T=Pt-Pw

common arguments against free trade: national security

1. the national security argument is the claim that certain industries are necessary to produce in a country for the protection of that country 2. although a country does not want its specialized military hardware made in a different part of the world, many industries use this argument when it is not necessary 3. the military should be the one making the decisions about where the materials are made, not politicians 4. not only that, but the military and tax payers would benefit from cheaper goods and services that the military buys, such as cheaper uniforms, when trading is allowed

Terms of trade

1. the rate at which countries trade is called the terms of trade -based on the opportunity cost (within that range) 2. the terms of trade will always lie somewhere between the two trading parties' opportunity costs -exactly where the terms of trade fall between those limits depends on the relative strength or demand for both products in both countries 3. in each graph, the new points lies along a "terms of trade" line, or a consumption possibilities curve -each country is able to go beyond its production possibilities curve 4. the gains from trade are the same kinds of improvements in well-being that country gets from having additional economic resources

common arguments against free trade: unfair competition

1. the unfair competition argument is based on the idea that all countries should play by the same rules, but realistically, not all countries do 2. if two countries are members of the WTO, and one feels the other is being unfair, they can make a complaint with the WTO -ex. Mexico complained that the US was unfairly banning its tuna when the US put a requirement on imported tuna that it had to be caught with dolphin-safe nets; WTO found that the US had put an illegal trade barrier up and repealed the requirement 3. when a country is accused of dumping, this is another example of the unfair competition argument 4. not all economists believe that dumping is unfair to the country where the goods are being sent--may get goods for cheaper

trade agreements

1. there are two approaches of free trade: unilateral and multilateral -unilateral is when a country on its own removes its trade barriers -multilateral: trade agreement between two or more nations --> NAFTA 1993, US + Canada + Mexico 2. the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) are two large multilateral trade organizations -in 1947, developed countries signed the General Agreement on Tariffs and Trade (GATT) -regular trade negotiations led to reduction in tariffs by the US and its major trading partners through GATT -in 1995, GATT was replaced by the World Trade Organization (WTO) -deals with the global rules of trade between nations -its main function is to ensure that trade flows as smoothly, predictably and freely as possible -In July 2016, 164 countries were members of the WTO. The WTO has stronger enforcement powers than GATT, and if it finds that a member has violated the rules, it can impose trade sanctions on that country

common arguments against free trade: protection as a bargaining chip

1. this last argument is protection as a bargaining chip which means that a country will threaten trade barriers to get another country to do what it wants -often the country that makes the threat is not willing to deliver on the thread 2. countries that follow free trade are collectively wealthier, but individuals do get hurt 3. countries that have free trade often have policies that help those who have been hurt gain new jobs -in the end, it is up to the individual to take advantage of these policies and gain the needed skills, or move to areas where jobs are located 4. if people do not and, instead apply political pressure to put up trade barriers, the country as a whole becomes poorer

unskilled workers in the country of origin

1. unskilled workers in the country of origin should gain because they face less competition and may be able to earn higher wages 2. owners of other productive resources in the country of origin are losers if they have less unskilled labor available

common arguments against free trade: infant industry

1. used by new or "infant" companies -they argue that new companies in the country cannot compete with established companies from other countries 2. for example, a new car company in a country would argue that it could never compete against the name recognition of Ford or Toyota, and so the country would require protection 3. this protection can be in the form of tariff protection or by giving a subsidy which would lower their costs and allow them to sell at a lower price at home and in other countries 4. however, in order to be successful, these types of policies require the government to know which new company would be able to compete -essentially, the government would be picking winners and losers, and thus very easily leads to corruption 5. Also, when the company "grows up" it may no longer need the extra help from the government -however, a company that gets protection, or a subsidy, has a strong incentive to never "grow up" 6. protection is not needed for companies to start, grow, and flourish, even against established companies

Tariffs and Quotas introduction

1. with all of these good reasons for free trade, why are some US firms and industries still protected from foreign competition? 2. one reason: income distribution. -a country as a whole benefits from free trade, but not everyone in the country benefits equally 3. protection of domestic industries is accomplished with two main tools: tariffs and quotas

Module 15

Trade Among Nations