GLOBAL ECONOMICS

 

Absolute Advantage-make more.  Opportunity cost.  Inside PPF-under civilization.   Opportunity cost is constant if it is a straight line.  Slope of trade line=price they chose to trade at Gains from trade=outside PPF.  Comparative Advantage-opportunity cost, who can do it cheaper.  Producing on PPF, consuming outside.  Not a zero-sum.  Person max. Their material well-being when they use their resources where they.  Trade doesn’t imply their living standards or income are equal.  Income increases for people with increased absolute advantage without trade.

GATT: General Agreement on Tariffs and Trade.  Agreement, not an institution.  Signed in 1947 by 23 nations.  Very successful in lowering trade barriers.  Initially mention all ignored agriculture, textiles, approached services.  Replaced by WTO in 1986The Uruguay Round 1986-1993Most ambitious round that reformed tariffs and subsidies on agricultural textiles, sensitive areas.  Birth to WTO.  Extended trading system into intellectual property rights and services

DOHA

World Trade Organization: The purpose of this organization was to help trade flow freely.  Deals with rules of trade between nations at global near global level.  A negotiating forum.  A set of rules.  A place to settle disputes.  Trade without discrimination.  Most favored nation-give you have to equal treatment to everyone.  National Treatment-once something is in the country, you may have to treat it just like your own stuff.  Freer trade gradually through negotiation.  Predictability through binding and transparently.  Lowers risks.  Confident that barriers aren’t going to change.  Promoting fair competition.  Encourage development and economic reform.  Extending transition time to developing.Current Members of WTO

International Monetary Fund (IMF): Monitors world’s economies, lends to members in economic difficulty, and provides technical assistance.  It is made up of 186 member countries.  The money comes from membership fee (quota) the larger a country’s output and trade, the larger its quota.  US largest quota.  257 has to be a major currency, 757 can be a small currency.  Power depends on your country’s economy and the big guys have a lot of power.  Only helps countries by invitation.  Charges interest.  Conditionality-we’ll give you $, but you have to make changes.  New since 1980’s World Bank: Consists of 187 country membership.  There is a membership quota with a source of financial and technical assistance to developing countries around the world.  Not a bank in the common sense, but a Helper with low interest loans, international free credits, and grants to developing countries.

5 Types of Regional Trade Agreements:

  1. Partial Trade Agreement: 2 or more countries liberalize trade in a selected group of product categories such as steel or autos.
  2. Free Trade Area (FTA)-Trade with specific region (NAFTA).
  3. Customs Union (CU):  An FTA plus a common external tariff (CET).  European Union in 1970’s and 1980’s.  MERCOSUR (South America).
  4. Common Market: A CU plus free mobility of factors of production.  EU in 1990’s.  ESA (Eastern and Southern Africa).
  5. Economic Union: A common market with coordination of macroeconomic policies including common currency, harmonization of standards and regulations.  Includes US, Canada, and EU.

RTA v. the WTO

An RTA is clearly a violation of most favored nation treatment.  So why would WTO allow an RTA?  Simple.  If it creates more trade than it diverts, the WTO isn’t going to care about it.  RTA’s-building blocks vs. stumbling blocks can create easier to reach agreement, Less domestic disruption, Experiment with new ideas, Credible threats.  Yet it undermines multilateral agreements, Polarize countries-piss people off, Sap energy, Discriminate against less-developed countries.  These International Instituions help to create order, Reduce uncertainty, Overcome free-rider program, Effectiveness ultimately depends on individual commitment.  Its cons are National sovereignty, Transparency, Ideology, and Symmetric implementation and adjustment cases.

Gains from trade: Adam Smith observed that increasing specialization in production was responsible for increased output. David Richards would in turn say trade is good for both parties, Theory of free trade and demonstrated the gains, From trade: one of the longest-standing and most agreed upon results in economies.  The Basic Assumptions would then be made to set the stage.  Only 2 nations, Only 2 goods, Only one input-labor, Technology is constant, No learning effects of production, Labor is perfectly mobile and can move back and forth between the industries, but not between countries.  If labor and capitalization become concentrated in that activity alone.  Difficult to develop a diversified and highly educated force.  National Income can fluctuate quality if commodity.  Price abruptly-leads to secure macroeconomic activity.  Can be a significant source of potential instability and corruption.  To avoid curse Strong institutions to guard against corruption.  Can be a significant source of potential instability and corruption.  Commitment to education and skills to develop human capital and diversify.

Shortcomings of the Riparian Model:

  1. It predicts an extreme degree of specialization that we do not observe in the real world
  2. Assumes away the effects of trade on distribution of income within countries
  3. Allows no role for diff. in resources among countries as a cause for trade
  4. Neglects the possible role of economies of scale as a cause for trade

Empirical evidence.  The basic prediction of the Ricardian Model-that countries should tend to export those goods in which their productivity is high-has been strongly confirmed by a number of studies over the year.  Higher productivity-export more.

New Theory of Trade

Ricardian Model-Smith and Ricardo believed productivity differences-and hence comparative advantage-war a result of each country’s new technology.  Ricardo considered a single homogeneous factor of production (labor) and would not have been able to produce comparative advantage with out technology difference in labor.  Activity using different technologies

Factor Endowments: Nations are endowed with different levels of factor inputs (land, labor, capital, and entrepreneurship)  What is the role of factor endowments motivating trade?  Hecksher-chain model of trade.  Founder of the modern theory of international trade.  Key difference: based on a country’s comparative advantage on its factor endowments, rather than differences in technology

H-O Theorem: Countries will export products that utilize their abundant and cheap factors of production and import products that utilize true countries factors.  Countries comparative advantage uses in the production of goods that intensively use relatively abundant factors.  For example, U.S. has a lot of land, true produce corn, etc. they have a comparative advantage in canola oil because of their endowments (not their labor).  Once this is determined, it should be possible to predict which goods they’ll export and import.  Relative abundance of a factor implies that in autarky its relative cost is less than in countries where it is relatively scarcer.  Relatively scarce resources are more expensive

Price Convergence: In autarky: Canada provides relatively more jeans because it has relatively more labor.  The relative price of jeans will be less.  The relative price of jeans will higher in the U.S.  As trade occurs, the world price of jeans will converge Graph.  The HO model provides a more sophisticated way to analyze gains and losses from trade because it drops unrealistic assumptions.  Labor can be divided into categories of different skill levels.  Other types of inputs can be included.  Industries can require different mixes of various inputs.  Advantages: Drops unrealistic assumptions.  Labor can be divided into different skill levels.  More than one input.  Varying input requirements for different goals resulting in different allocation of benefits among producers.  Displays systematic relationship between factor endowments in a country and winners/losers of trade.

Income Distribution effects of Trade

Trade produces a convergence of relative prices.  Change in relative prices have a strong effect on relative earnings of input factors.  In Canada, where $ of jeans rises, people will get their income from labor gain from trade, and those who get….

Stopler-Samuelsom Theorem

Owner’s of a country’s abundant factors gain from trade but owners of a country’s scarce factors lose.  Theorem: An increase in price of good raises the income earned by factors that are used intensively in its production.  Not every factor used in production, but the abundant factor.  Ultimate effects on income of an opening of trade depend on flexibility of affected factors

Specific Factors Model.  Factors of production that are “stuck” in an industry, at least temporarily, are referred to as specific factors.  Ex: -commodities is bread and steal.  Factors are land, labor, and capital.  Bread requires land and labor.  Steel requires capital and labor.  Land and capital are specific factors in the short run are immobile.  Labor is a variable factor and is mobile between industries.  Suppose the introduction of trade leads to a drop in the price of steel (capital and labor).  In the long run: landowners gain and capital owners lose.  In the short run: Since land is immobile, landowners whose land is used for steel production will be hurt.  Since capital is immobile, capital owners whose capital is used for bread will gain

Policy Implications: Most economists don’t regard the effects of trade on income distribution as a good reason to limit trade.  In its distribution effects, trade is no different from many other forms of economic change, which are not normally regulated.  Economists would rather address the problem of Income Distribution directly; rather than by interfering with trade flows.  But is a highly contested issue.  Those who lose from trade are usually more informed, cohesive, and organized

Empirical Evidence

Tests on US Data: Leontief found that U.S. exports were less capital-intensive than U.S. imports, even though the U.S. is the most capital-abundant country in the world Leontief Paradox.  He suggests that the U.S. comparative advantage is actually high in skilled labor, rather than the traditional idea of capital.  Tests on global data: Bowen, Leamer.  Implications:  While the HO model has been less successful at explaining the actual patterns of trade, it remains vital for understanding the effects of trade, especially its effects on the distribution of income

Why is Comparative Advantage not enough?  Trade models built exclusively on the idea of Comparative advantage have a mixed record of success in predicting trade patterns.  It’s very difficult to measure a country’s Comparative advantage.  Even if the Comparative advantage is known, the country may have several products to choose from which utilize the abundant factor.

Internal Economies of Scale (Ex: Electrical Utility)

Both of the previous models assumed constant returns to scale: When inputs doubled, outputs also doubled.  In practice, many industries are characterized by economies of scale: Production is more efficient the larger the scale at which it takes place.  Doubling inputs more than doubles output.  Decreasing costs over a relatively large range of output.  Economies of scale can be a source of comparative advantage.

Marginal Cost (MC)-how much more to produce 1 more

Average Cost (AC)-Total Costs/# of units

OFFSHORING AND OUTSOURCING

Outsourcing-another firm does part of the other company’s business.  Off shoring-same company, outside of the U.S.  Off shoring and Outsourcing-Different company outside of the U.S.  Off-shoring became a concern in the 1980’s.  Modern communications and transportation technology made it possible for firms to relocate production abroad.  The effects and extent of off-shoring are not well understood since most countries do not collect the necessary types of data motivation.  Trade in services should be no different from trade in goods.  Specialization and trade should provide the same or similar gains for services as they do for goods.  Conventional wisdom: firms relocate abroad in order to find low wages or escape environmental/labor regulations.

Concerns: Effect off-shoring has on home country, particularly on jobs. Possibilities: Job losses in the home country or at other times.  Evidence: Most firms locate production offshore in order to obtain access to a market and to produce specialized products that fit a particular market’s need contrary to conventional wisdom that says firms relocate abroad in order to find low wages or escape environmental/labor regulations.  Conventional wisdom in not wrong but describes only a small share of off shoring.  Vast majority of off-shoring by U.S. multinationals is in high-income, high-wage economies (67% overall and 80% manufacturing).  Additionally, most off shoring is…Graph.  Monopoly has no incentive to drop price.  Internal-8 per unit depends on size of firm.  External-size of industry but not on the size of any 1 firm:If America A concentrates production in Industry A, it will need more labor: That labor will have to come from a industry B.  Industry B will have to decrease or stop production.

Where does trade enter?  Consumers still want a variety of goods.  British can shift labor form its dominant industry A to industry B.  Each country must concentrate on producing only a limited number of goods.  International trade makes it possible for each country to produce a restricted range of goods and take edge econ of Q without sacrificing variety in consumption.  Graph  However….Economies of scale lead to a market structure other than that of perfect competition.  Internal economies of scale giver larger firs a cost.

Theory of Imperfect Competition: Firms are aware they can influence the prices of their price setters

Monopolistic competition: Assumptions: Each firm differentiates its products from rivals.  Gives each firm differentiates its products from rivals.  Insulates each firm somewhat from competition.  Takes rivals: price as given (they can’t influence it-changing their price doesn’t change rival’s price).  Ex, possibly automotive industry in Europe Ford, GM, VW, REANAULT, VELVO.  Limitation: few industries well described by MC

Equilibrium in MC

The more firms there are the more intensely they compete, and the lower industry price (PP).  Less each firm sells, higher their costs (CC)

MC and Trade

In industries with economies of scale, market size matters because market size constraints the variety of goods that a country can produce and scarce of its production.  Trade forms an integrated market bigger than any individual market and loosens constraints.  Trade=opportunity for gain even if countries don’t differ in technology (Ricardo) or resources.

Increased Market Size.  Number of firms in MC industry the prices they charge are affected by the size of the market.  Larger markets lead to: more firms, more sales to firms, move a variety of products, lower prices, but it is unclear it firms will locate in domestic country or foreign country.  Trade allows us to have a huge variety in our lives.  An increase in size of market allows each firm to produce more and have lower AC.  Downward shift of CC.  Leads to more firms, more variety, lower price.  Possibility to increase whole market.

EOS and Comparative Advantage

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

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

How important intra-industry trade is depends on similarities of: Countries with similar relative amounts of factors of production are predicted to have intra industry trade.  Different relative amounts of FDP interindustry unlike interdinustry trade on H-O model, income distribution effects are not predicted to occur with intra-industry trade.  25 % of world trade is intra-industry trade.  Some industries are=more than others.  Industries requiring skilled labor, technology, and physical capital-intra industry trade for US.

Grubel-lloYD Index

The broader the definition of an industry, the more trade appears to be intraindustry trade

GLi=1-! X-M! /X+M

Closer to 1:a lot of intra

Closer to 0: little number of intra

The are many benefits of intra-industry trade.  Export/import prices lower because firms can lower their costs by producing for a larger market.  In previous models, import prices decrease but export prices increase.  Also the number of firms increases, so employment increases.  Could be in either country, however.  Consumer choice increases.  Fewer income redistribution effects

Dumping is a consequence of imperfect competition.  It is beneficial to firms because of monopolistic competition.  Why would you sell to foreign more?  Because they can differentiate the price.  An incentive means a higher marginal revenue.  Because higher domestic market that foreign (typically) because international markets are imperfectly integrated due to both transportation costs and protectionist trade barriers.  Means foreign sales are more affected by their pricing than domestic sales.  Firms have less monetary power in foreign markets.  Economies of scale to lead to increase of international trade, lead to imperfect competition.  Imperfect competition has consequences for international trade.  Most striking result: firms do not necessarily charge same price for goods that are exported and those that are sold to domestic buyers.  Dumping is when a foreign country selling goods in another country for below cost.  Example of price discrimination-different customers, different prices.  Controversial issue in trade policy.  Widely regarded as “unfair”.  Subject to special rules and penalties

Price Discrimination and dumping may occur if Imperfect competition exists: firms must be able to set market prices rather than take them as given

International economics is divided into two broad subfields: international trade and international money.  Transactions that involve the physical movement of goods or a tangible commitment of resources are the domain of international trade analysis.  In 2005, total world imports were estimated to be 20.5 % of world gross domestic product (GDP).  The current process of increasing economic integration among national economies, better known as globalization, is actually the world’s second wave of such integration.  Examples in international factor movement: Direct foreign investment, labor migration, international borrowing and lending.  The measures economists examine to assess the degree of globalization and international economic integration: similarity of prices in separate markets, factor movements, and trade flows.  The U.S. economy today appears more integrated with the world economy as signified by its increased index of openness.  An indicator that today the U.S. Economy is less integrated with the world than it was a century ago is its reduced proportion of foreign-born citizens.  “Openness” is the relative importance of trade to a national economy; (Exports + Imports)/GDP.  Small countries tend to be more open than the larger countries.  Three kinds of evidence that economists use to support the assertion that open economies grow faster than economies that are close to the world economy:

1)   Evidence of statistical comparison of countries-statistical tests of the relationship between trade policy and economic growth yield results that consistently show that more open economies grow more rapidly

2)   Casual empirical evidence of historical experience-countries with the same background that were divided by the war indicate that those who closed their economies from the rest of the world suffered

3)   Economic logic and deductive reasoning-Open trade fosters competition, innovation, and learning by doing and brings international best practices to the attention of domestic producers, spurring greater efficiency, export expansion, and economic growth

4)   Current day trade different than earlier trade: the share of manufacturing trade has risen, while the share of agricultural trade has fallen and the fraction of current international trade is organized and conducted by multinational firms has grown since 1950

Industrial Policy is a government policy assigned to create/support an industry.  Many have come not to believe in this policy, but their are justifications for this reason.

Market Failure=when market fails to deliver an optimal quantity of goods and services

  • The value of a good to private consumers (private returns) and to society (social returns) fails to equal to its cost of production
  • Not all costs/benefits of an activity, some are externalized-outside area of concern of economic agents engaged in activity
  • Externalities-market failure that results from externalization of costs of benefits

Government needs to step in: all costs of regulation

When social returns > private returns, free-market economy produces less than optimal amount

  • Not all benefits are captured by the firm, so they are not included when making production decision

When social returns < private returns, a free-market economy produces more than optimal outputs

Ex: positive externality: live next door to orchestra

  • Either too much negative is produced or not enough positive is produced

GRAPH EXAMPLE

Justification 2

Strategic Trade Policy

  • Selective use of trade barriers and industry subsidies in order to capture some of the profits of foreign firms

Requires that: industry has economies of scale, firms in industry have market power

  • Tries to convince foreign firms to leave the market
  • Game theory:

The importance of Industrial Policy tools is one that has become ever present in today’s global economy.

The Uruguay round and WTO prohibit direct subsidies.  However they can subsidize “pre-competitive” activities (like research).

Governments can use other policies.  Providing info about foreign markets to domestic firms.  Helping negotiate contracts.  Lobbying foreign governments to adept to home country standards.  Trying foreign aid to purchases from domestic firms.  Also seen: discounted foreign currency, low-interest plans, special tax treatment, government purchases.

High Performance Asian Economies (HPAE)

  • Economic growth in Japan took off in 1950’s
  • Shortly after growth in: 4 tigers-Hong Kong, Singapore, South Korea and Taiwan
  • Indonesia, Malaysia, and Thailand-classified as newly industrial countries

Asian Miracle:

World Bank: designated them high performance, as Econ (HPAE) newly industrializing haven’t quite caught up

Asia=variations in size, range in growth rates, different urbanization percentages

What characteristic is true to explain the growth?

HPAE Income convergence.  We still haven’t figured out why countries are growing.

4 reasons=common to all 8 economies

  1. Shared Growth-entire country benefited “share the wealth”
  2. Rapid Accumulation of Physical and Human Capital
  3. Rapid Growth of manufactured exports
  4. Stable macroeconomic environments
  5. Open Economies

Latin American contrast: Far less impressive results.  High levels of inequality.  Periods of macroeconomic instability.  Inward orientation: closed economy

  1. Shared Growth.  Inequality of income and growth already low at start of period of high growth.  Kuznet’s curve=growth in developing countries=result first in falling and then if world grows.  Didn’t happen in HPAE.  Wealth sharing mechanism. Land Reform.  Free public education.  Free basic health care.  Significant investments in rural infrastructures (clean water, transportation, communication).  Could spread wealth to outlying areas.  Rural areas could start their own businesses and have better lives.
  1. Rapid Accumulation of Physical/Human Capital
  • High levels of investment=high savings rates

The level of savings in HPAE Birth rates/death rates decrease:

  • Less children
  • Higher % of population: working
  • High savings=Higher savings rate
  • Rapid rate of income growth
  • Low inflation
  • Public investment in education: primary and secondary levels
  • Social impact=much greater at this level than at university level
  • Literacy rates rose dramatically: skilled labor force
  • High skilled workforce capable of sophisticated forms of production
  1. Rapid Growth of Manufactured Exports
  • HPAE began development push with import substitution policies (domestic instead)
  • These policies quickly replaced with emphasis on export promotion
  • Between 1985 and 2000 the HPAE more than doubled their share of total world exports

8 countries=1/5 of world exports

  1. Stable Macroenvironment environment

A persistent problem of Latin America has been frequent reoccurrence of macroeconomic crises.  The HPAE are not completely crises free, but policy responses were usually give quick and appropriate.  Kept deficits and debts manageable.  High exports generated foreign assets.  Governments created rules that foster efficient outcome to ensure that individuals and business use their resources in most productive manner.

What makes Government policies credible?

-Property rights: It’s mine until I sell it.

-Competent bureaucracies: It’s easy to do business.  US when she worked in Russia.

-Freedom to make contracts that will be enforced: Enter into wage agreement that won’t break and widespread access to information.

Regulations everyone knows and understands

Clear and well-publicized regulations

Several of HPAE do no support political/civil liberties.  However, authoritarian HPAE did foster growth.

Fiscal Discipline

  • Maintenance of stable macroeconomic environment requires:

-Fiscal discipline, stable exchange rates

-Governments provided stable environments for good business platforms

Were the East Asian Economies Open?  HPAE placed high reliance on their export sectors through active promotion.  Were their trade policies open?: Considering tariff rates/quotas=not enough.

The Role of Industrial Policies

Targeting at specific industries

Directed credit-low international loans are common in HPAE.

Export Promotion

Specific Industries

  • An attempt to change comparative advantage by channeling resources to favored industries

They were strongest in: Japan (steel, airbus, textiles, shipbuilding) SATS, Korea (heavy and chemical industries), and Taiwan (research institutes, science parts, import subs).  Import restrictions, licensing, quotas, tariffs, export subsidies.  Many firms earned high profits domestically, compensating for losses in international markets.

Directed Credit: Signaled the private sector of a favored government industry.  It encouraged private lending to new and risky industries (Not handling over money).  Government placed macroeconomic stability above industrial policies-programs scaled back if fiscal problems arose.  Really had to perform-take government $, use it, become efficient producer, get stuff out the door and out the country.  If government starts running out of money, programs are cut off so countries don’t go into huge amount of debt.

Did the policies Work?  There was no consensus.  The World Bank says general industrial policies did not foster growth  They do agree that if industrial policies are going to be successful, countries must have:

  1. Clear performance criteria (live targets)
  2. Mechanism to monitor and enforce compliance
  3. Low costs so that non-targeted sectors do not suffer

Source for HPAE Growth can be seen in east Asia.  East Asia is remarkable for its growth in per capita income and labor productivity.  Growth comes from more capital, education, productive use of available resources.Growth Accounting:  Increase Real GDP/Capita Increase Aggregate Production Increase labor productivity Increase Capital Increase Human Capital Increase Technology.  Most of their growth coming from capital accumulation.

Tariffs and Quotas

Political Equilibrium Analysis.  We are only considering effects of tariffs and quotas on protected industry

Tariff-tax on imported good

Revenue tariff: imposed on good not produced domestically just there to make $

Specific tariff: fixed charge per unit imported ex: $100 per car

Ad Valorem tariff: percentage charge per value imported ex: 27 per car

Protective tariff: imposed to protect domestic industry

Protective and revenue=why you impose

Specific and ad valorem=how you impose

History: Oldest form of trade policy.  Initially used as source and government resource before creation of income tax.  Then used to protect domestic industries.  Use has declined, now non-barrier is more common

Consumer Surplus-the value received by consumers over and above what they are required to pay.  Everyone values each good differently.  This occurs because firms can’t charge each consumer a different price-car dealership.  It is the difference between what you’re willing to pay and what you end up paying.  It always above price and below the demand curve.

Producer Surplus-the difference between the minimum price a producer would accept and the price is actually receives.  Receive benefit that didn’t cost anything to them.  It always below price and above the supply curve.

How do you find Effects of Tariffs?:                                    Free Trade                     Post-tariff

Price to consumers Pw Pt

Domestic Consumption                                                Q2                                    Q2*

Domestic Production                                                            Q1                                    Q1*

Imports                                                                        Q1Q2

Consumer Surplus                                                            a+b+c+d+e+f                        e+f

Producer Surplus                                                            g                                    g+a

Government Revenue                                                0                                    c

Tariff Revenue

Efficiency Loss

Deadweight consumption loss                                    0                                    d

Deadweight production (efficiency loss)                        0                                    b

Imports

Net Welfare

Consumer Loss

Producer Gains

Quota Rents

In free trade, large countries may increase national welfare when they place a tariff on imports because large countries reduce the world price of the import when they levy a tariff

Other Potential Costs

1. Retaliation.  Loss of jobs in export industries and can escalate rapidly.

2. Innovation reduces competitive pressure on domestic firms.

3. Rent seeking uses lobbying to keep protection in place.  Use resources for nonproductive activities.  For example, if you are an industry that wants tariffs because other countries are undercover you have to go to congress, trying to get tariff: very expensive; inefficient.

Large country case is when one large enough to influence world price if there is a change in consumption.  Changes in quantity imported influence world price.  Imposition of tariff decreases with domestic consumption, which decreases imports, which decreases world

Quotas: Quantity restriction on imports.  Similar impact.  Import Quota: generates rents that might go to foreigners.

Types:

  1. Outright quantity limitation
  2. Import licensing requirement
    1. Forces importers to obtain government licenses
    2. Less transparent than quota Ex: Liquor license
    3. Voluntary Export Restraint (VER)
      1. Not always entirely voluntary
      2. Loosely limited by Uruguay Round

Economic Effects: No Government revenue from quota.  Instead, foreign producers earn greater profits: quota rents because they artificially limits supply which increases price.

Comparing Quotas and Tariffs

Like Tariffs: Domestic consumption of imported good.  Domestic production rises. Consumer price rises.  Unlike Tariffs: No gain in government revenue. If eventually consumer demand of a quota good increases, the price increases and produce surplus increases (with tariff price would stay).  Domestic firms prefer quotas to tariffs.

Hidden Protection: Trade Protection-Tariffs.  No Tariff Barriers-Quotas.  Non-tariff measures are any regulatory or policy rule (other than tariffs and quotas) that limits imports.  May be directly intended as trade-related, or exist for some other purpose but impact traded.  Complicated Custom procedures.  Environmental/consumer health precautions.  Ex: lead paint in China.  Technical Standards.

Tariff            Export Subsidy Import  Quota Voluntary

Producer Surplus                                    I            I            I            I

Consumer Surplus                                    D            D            D            D

Government Net Revenue                        I            D            None            None

National Welfare                                    Ambiguous D            Ambiguous            D

A tariff decreases the world price of imported goods and increases domestic price of imported goods.  It also decreases the quantity traded when a country is “large.”  An export subsidy.  World price of exported good decreases.  Domestic price of exported good increases.  Increases quantity produced when country is large.  The Welfare effect of a tariff, quota, and export subsidy can be measured by: Efficiency loss-consumption and production in terms of trade gain or loss

Chapter 7-Commercial Policy

Policies of protection Process: A firm or industry initiates an investigation into a foreign country/firm practices.  They can also talk to WTO.  2 Industries most commonly receiving protection are agriculture and clothing

Effective vs. Nominal Rates of Protection

Effective Rate of Protection-A measurement of the amount of protection provided to an industry by a country’s tariff schedule.  To measure: Effective rate= (value added tariff-value added)/value added.  Value Added: Contribution of capital and labor added to a finished price.  Value Added=Final Price-Price inputs.  Tariff Escalation is when industry levies a tariff of x but receives protection > x.  Small nominal final good tariff + large % of imported inputs=large effective rate of protection

Arguments for Tariffs:

  1. Infant Government-Government approach: In developed countries, tax revenue is relatively easy to collect.  In developing countries, tariffs are an attractive method of raising government revenue: goods pass through customs, administrative costs low, can act like a corporate income tax or luxury tax: target it to certain goods, used when getting started.
  2. National Defense-certain industries need to be protected to ensure adequate output in case of war. Problems: Difficult to identify essential industries; might over protect.  Costly means of accomplishing this end; production subsidy would be less expensive.
  3. Infant Industries-new industries in developing countries initially need protection to allow them to grow in the face of foreign competition.  Problems: Difficult to predict industries which will become competitive.  Difficult to determine industries with falling costs.  Industries may never grow up Manufacturing sector
  4. Senile Industries-to provide a method for older, comparatively disadvantaged to move resources to new industries without hurting the economy; Ex: Landlines, CD’s, VCR’s.  To help people with jobs in industry.  Easier to pick these firms than the infant firms.  Difficulty lies in the execution.  More efficient to directly aid firms and workers.
  5. Create and Protect Jobs-to create jobs, since tariffs increase domestic output and protect jobs from low wages abroad, economists hate this one.  Problems: Jobs in non-protected industries fall.  It’s a realignment not a net gain.  May be a long run decrease in employment due to inefficient use of resources in protected industries.  It’s expensive-other solutions=less costly (like subsidies).  Economies with more tariffs usually grow more slowly.  How do industries get away with this? Benefits are very concentrated
  6. Retaliation-for unfair trade practices.  Problems: Can lead to escalating trade wars. Free trade benefits all.  On the other hand, since free trade benefits all, if a tariff now will induce others to lower theirs, all eventually benefit.  Market size=important; gives them their entire domestic market to themselves, may drive us out.  Export Subsidies are A payment to a firm or individual that exports goods.  They encourage exports either as a specific or ad valorem tariff.  Effects on prices are essentially the reverse of a tariff.

Chapter 8-International, Environmental Standards

Countervailing Duty: Tariff granted to U.S. industry hurt by a foreign country’s subsidizing its firms; if industry can prove: subsidies allow foreign firms to sell products at lower prices, countervailing duty seeks to counter the effect of the benefits from a subsidy, Problem: defining a subsidy is subjective, Infrequent: 4-5 times a year

Uruguay Round defined subsidies as: Direct loan or transfer, Preferential tax and treatment, government provided goods/services other than infrastructure; ie-training,  Income and price supports.  Antidumping Duty-tariff levied on an import that is selling at a price below product’s fair value.  Problems: Defining fair value is subjective, source of tension between countries, approximately 21 duties imposed per year.  Ultimately a country can disagree with WTO or other world organizations and get out.  WTO Policy-Dumping occurs when an exporter sells a product at a price below the one it charges in their home country.

To determine whether a good is being dumped: Compare to price in third country markets, Estimate cost of production, Estimate foreign firm’s production costs, Countries will probably be pissed if you accuse them of dumping.  Not only does a country have to prove other country is dumping, also has to prove that it’s hurting them.  Problems: Economic theory and legal definitions are not in agreement.  If a firm is not earning a share above average profits somewhere, it cannot maintain a price somewhere else that is below the cost.  Firms often sell below costs.  May sell at below costs in order to penetrate a market.  May go for extended periods selling at prices that do not cover fixed costs as long as the costs of variable inputs (labor and materials) are covered.  The labor argument for tariffs, argues that it is unfair for a country to face imports from countries that have lower wages.  The problem with this argument is that it ignores the fact that cross country wage differences reflect productivity differences and ignores the fact that tariffs or quotas are an expensive method of saving jobs

Escape Clause Relief-Temporary tariff of imports to allow a domestic industry to escape the pressure of imports and obtain a period of adjustment.  Refers to a clause in U.S. and GATT trade rules.  Initiated when a firm or industry petitions the VSITC directly for relief.  Not very common.

Section 301-U.S. Trade Representative (USTR) to take action against any nation that persistently engages in unfair trade practices; US defines meaning of unreasonable and unfair trade policies

Nontariff Trade

Labor Standards: formal Trade Barriers have been declining since WWII.  New obstacles have been appearing.  Unintentionally as a result of national laws and regulations for domestic reasons.

Achieving Deeper Levels of Integration:

  1. Harmonization of Standards:Share common standards.  EX: Electric sockets (shape), flash drives
  2. Mutual Recognition of standards: We will honor your law and you will honor ours.  Keep domestic standards and recognize foreign standards.  For example, minimum wage is different in other countries.
  3. Separate Standards: Keep domestic standards.  Refuse to recognize.  For example, China Lead Paint.

No one approach is best.  Some create larger markets and greater efficiency (Ex. Common size electrical outlets).  Some freeze in place inferior technology.  Some less-developed countries have less ability to enforce standards.  Can be probably for less developed countries what works best for situations?

“Race to the Bottom”: Countries with high standards-forced to lower standards or experience a loss of jobs and industry.  Unfair trade practice complaint: failure to enact or to enforce standards gives firms in the countries with lower standards a commercial advantage.  How do you compete?

Ex: We have to lower our minimum wage because it’s hurting our trade

-In order to compete, countries have to lower standards

What are labor standards?

Wide ranging with no universal agreement

Basic rights proposed by international labor organization and OECD:

  • Prohibition of forced labor
  • Freedom of association
  • Right to organize and bargain collectively
  • End to exploitation of child labor
  • Nondiscrimination in Employment

Other potential standards-no agreements-most contentious

Ex: minimum wages, limits on hours worked, health and safety issues

Arguments for Anti-globalization

Transbouundary vs. nontransboundary effects

Pollution havens

Kuznet’s Curve

Pollution Spillovers

Chapter 10-Exchange Rates

The $ of one country’s currency stated in terms of a second country’s currency

Allows us to compute $ of one country’s exports in terms of other country’s money

Depriciation=Increase in Imports=Decrease in CA=Increase in Financial Assets

Appreciation=Decrease in Imports

Reasons for holding Foreign Currency:

Trade and investment-to make receive payment for transactions; include tourists

Interest Rate arbitrage-borrow rates are low, loan where rates are high, primary linkage between economies, keeps interest rates from diverging too much

Speculation-chance for profits by correctly predicting exchange rate movements, some believe this keeps currency values in alignment, others consider destabilizing

Foreign Exchange Market

Commercial banks are at the center of market.  Almost every sizable international transaction involves accounts at commercial banks.  They hold inventories of foreign currencies as part the services to customer.

Interbank trading:

Currency trading between banks

Corporations and individuals

Nonbank Financial Institutions-Mutual Funds, Hedge funds, Passion funds

Foreign exchange brokers-most major banks don’t deal with each other, but rather through a broker

Permits banks to maintain desired foreign exchange balance

Central Banks

  • Volume of foreign exchanges not large

Effects of Changes in the rates of home and foreign economic growth on the supply and demand curves for foreign exchange Graphs

F-forward exchange rate

R-spot rate

The Effects of an Increase in Home’s Interest Rates

Real Exchange Rate=Nominal Exchange Rate x Foreign Prices/Domestic Prices

Fixed exchange rate system

Flexible (floating) exchange rate system

Banking Crisis-steep recession

An Exchange rate crisis is caused by macro imbalances.  Imbalances in government budgets, trade balances and currency values may set off.  This may be a result of over-expansionary fiscal policies.  Cause budget and current account imbalances, inflation.  Inflation causes appreciating real exchange rates.  Difficult to maintain fixed/pegged rate, currency becomes overvalued, leads to capital flight (get out before rate falls).  Describes many issues that began in developing countries.  This in turn usually leads to a recession.

Crises caused by Volatile Capital Flows

Economics are highly vulnerable to high votality of financial capital and ability to instantaneously shift capital.  Large volume of saving remains domestic, but increasing amount going international and responds to interest rates, exchange rate expectations, and economic activity.  The “herd” mentality can turn small crisis into big one.  There is a mismatch between time frame of borrowers and lenders can exacerbate problem (short-term deposits but long-term loans)

In domestic policies, crises are not avoidable, but can be mitigated.  Maintain credible and sustainable fiscal/monetary policy.  Active supervisors and regulation of financial system.  Provide timely information about key economic variables.  Desired extent of domestic policies uncertain.  Bail out banks?  Limit capital outflows/inflows?  Manage exchange rates.

Moral Hazard-financial sector dysfunction spreads problems to the rest of economy, creating a large incentive to keep financial sector operational.  However, if it is someone will bail you out of your problems.  You are less likely to act prudently or manage risk: MH.  Financial sector regulation: Basel Capital Accord II.  Captial requirements decrease Moral hazard by requiring bank owners to invest in their own banks

Supervisory review: provide standards for daily business practices and risk management oversight

Information disclosure: encourage market discipline by requiring disclosure

Why didn’t it prevent 2007 meltdown?  New forms of finance and financial instruments.

Crises Management

Cured by: Cutting deficit (and intensify problems of collapsing currency).  Raising interest rates to help defend the currency (and spread recession).  Letting currency float.  Politically difficult.  Caused by sudden Capital flight; are harder to cure.  Collapsing currency can be defended through interest rate hikes, may cause bankruptcies and other problems.

Countervailing Duty: Tariff granted to U.S. industry hurt by a foreign country’s subsidizing its firms; if industry can prove: Subsidies allow foreign firms to sell products at lower prices, Countervailing duty seeks to counter the effect of the benefits from a subsidy.  Problem: defining a subsidy is subjective and it is infrequent only being used 4-5 times a year.

Uruguay Round defined subsidies as:

(1) Direct loan or transfer

(2) Preferential tax and treatment

(3) Government provided goods/services other than infrastructure; ie-training

(4) Income and price supports

Antidumping Duty-tariff levied on an import that is selling at a price below product’s fair value

Problems: defining fair value is subjective, source of tension between countries, approximately 21 duties imposed per year.  Ultimately a country can disagree with WTO or other world organizations and get out.  WTO Policy-Dumping occurs when an exporter sells a product at a price below the one it charges in their home country.

To determine whether a good is being dumped:

  • Compare to price in third country markets
  • Estimate cost of production
  • Estimate foreign firm’s production costs
  • Countries will probably be pissed if you accuse them of dumping
  • Not only does a country have to prove other country is dumping, also has to prove that it’s hurting them

Problems: Economic theory and legal definitions are not in agreement.  If a firm is not earning a share above average profits somewhere, it cannot maintain a price somewhere else that is below the cost.  Firms often sell below costs.  They may sell at below costs in order to penetrate a market.  May go for extended periods selling at prices that do not cover fixed costs as long as the costs of variable inputs (labor and materials) are covered.  The labor argument for tariffs, argues that it is unfair for a country to face imports from countries that have lower wages.  The problem with this argument is that it ignores the fact that cross country wage differences reflect productivity differences and ignores the fact that tariffs or quotas are an expensive method of saving jobs

Escape Clause Relief-Temporary tariff of imports to allow a domestic industry to escape the pressure of imports and obtain a period of adjustment.  Refers to a clause in U.S. and GATT trade rules.  Initiated when a firm or industry petitions the VSITC directly for relief.  Not very common.

Section 301-U.S. Trade Representative (USTR) to take action against any nation that persistently engages in unfair trade practices; US defines meaning of unreasonable and unfair trade policies

Nontariff Trade

Labor Standards

  • Formal Trade Barriers have been declining since WWII
  • New obstacles have been appearing
    • Unintentionally as a result of national laws and regulations for domestic reasons

Achieving Deeper Levels of Integration:

(1) Harmonization of Standards: Share common standards

EX: Electric sockets (shape), flash drives

(2) Mutual Recognition of standards

We will honor your law and you will honor ours

Keep domestic standards

Recognize foreign standards

Ex: minimum wage in different countries

(3) Separate Standards

Keep domestic standards

Refuse to recognize

Ex: China Lead Paint

No one approach is best

  • Some create larger markets and greater efficiency (Ex. Common size electrical outlets)
  • Some freeze in place inferior technology
  • Some less-developed countries have less ability to enforce standards
  • Can be probably for less developed countries what works best for situations?

“Race to the Bottom”

  • Countries with high standards-forced to lower standards or experience a loss of jobs and industry
  • Unfair trade practice complaint: failure to enact or to enforce standards gives firms in the countries with lower standards a commercial advantage

How do you compete?

Ex: We have to lower our minimum wage because it’s hurting our trade

-In order to compete, countries have to lower standards

What are labor standards?

Wide ranging with no universal agreement

Basic rights proposed by international labor organization and OECD

  • Prohibition of forced labor
  • Freedom of association
  • Right to organize and bargain collectively
  • End to exploitation of child labor
  • Nondiscrimination in Employment

Other potential standards-no agreements-most contentious

Ex: minimum wages, limits on hours worked, health and safety issues

Arguments for Anti-globalization

Transbouundary vs. nontransboundary effects

Pollution havens

Kuznet’s Curve

Pollution Spillovers

International Economics Glossary of Terms

  1. Deep integration-economic integration beyond the removal of obvious trade barriers (tariffs) more closed; health and safety regulations
  2. Shallow integration-more integrated; have a lower set of tariffs/quotas
  3. Foreign direct investment-flows of capital representing physical assets such as real estate, factories, and business
  4. Bretton Woods conference-created International Monetary Fund
  5. Doha round-consider trade issues of importance to developing countries, highly discussed farm subsidies in developing countries
  6. Foreign exchange reserves-dollars, yen, pounds, euros, or another currency (or gold) that is accepted internationally
  7. GATT-Agreement, not an institutionWas signed in 1947 by 23 nationsIt was very successful in lowering trade barriersInitially it mentioned all ignored agriculture, textiles, and approached servicesReplaced by WTO in 1986
  8. IMF-multilateral institution serves as the lender of last resort; funded by collecting fees/quotas from members
  9. IMF conditionality-If simple economic reforms such as a cut in the value of currency, or limits on the central bank’s creation of credit, are insufficient to solve the problem permanently, then the IMF usually requires a borrower to make fundamental changes in the relationship between government and markets in order to qualify for IMF funds. Refers to the changes in economic policy that borrowing nations are required to make in order to receive IMF loans.
  10. Lender of last resort-to prevent the spread of some types of financial crises.  A source of loanable funds after all commercial sources of lending have disappeared.
  11. MFN status-Most-favored nation status is allowed by the WTO under some circumstances because it gives no nation more preferable trading conditions than all other nations.  Says that you treat all your trading partners as well (same tariffs, etc.) as treat your best partners.  No discrimination among trading partners.  All quotas, tariffs, etc. must be the same.  The WTO does occasionally allow violations of MFN status in regional trade agreements if the overall gains in the regional agreement outweigh the losses from the preferential treatment
  12. Sovereignty-Multilateral organizations help resolve disputes but they may also reduce national sovereignty.  Covers the rights of nations to be free from unwanted foreign interference in their affairs.
  13. Regional trade agreement-free trade, includes partial trade, free-trade area, customs union, common market, and economic union
  14. World Bank-international institution that formed at the end of World War II with the initial focus of reconstruction of war-torn areas and today lends to developing nations to aid in economic development
  15. WTO-result of Uruguay Round.  Purpose is to help trade flow freely.  Deals with rules of trade between nations at global near global level.  A negotiating forum.  A set of rules.  A place to settle disputes.  WTO Principles: Trade without discrimination, Most favored nation-give you have to equal treatment to everyone, National Treatment-once something is in the country, you may have to treat it just like your own stuff, Freer trade gradually through negotiation, Predictability through binding and transparently, Lowers risks, Confident that barriers aren’t going to change, Promoting fair competition, Encourage development and economic reform, and Extending transition time to developing
  16. Autarky-complete absence of trade
  17. Absolute advantage-A nation does not need to have an absolute advantage in order to have a comparative advantage in producing a good or service.  A country may not have any absolute advantage and still benefit from trade.  Gains from trade are based on comparative advantage-which country, relatively speaking, produces a good cheaper.  They should specialize and trade in that good.  In two-country trade, each country will have one comparative advantage.
  18. Comparative advantage-opportunity cost, who can do it cheaper opportunity cost, who can do it cheaper.  Nations get significant advantages if they have a single, valuable, natural resource, but with significant downside risk.  Not always.  Some countries suffer from the “resource curse.”  Endowment of single resources does not guarantee prosperity.  Labor and capital can become concentrated in that activity alone.  National income can fluctuate quickly if commodity price changes abruptly.  Can be a significant source of political instability and corruption.  David Ricardo introduced the simple trade model and the concept of trade based on comparative advantage
  19. Gains from trade (GRAPH)-improvement of national welfare.  In the presence of international trade, we expect the foreign and domestic prices of a good to converge.  The increase in consumption made possible by specialization and trade.
  20. Mercantilism-stresses exports over imports, primarily as a way to obtain revenues for building armies and national construction projects
  21. Price or trade line (GRAPH)-the trading possibilities for a given country
  22. Resource curse-The economic and/or political problems caused by an abundance of one valuable natural resource such as petroleum
  23. Zero sum game-one nation’s gain is another nations loss.  The costs and benefits of an activity cancel each other out.
  24. Factor abundance-relative cost is less than in countries where it is relatively scarcer
  25. Hechscher-Ohlin theory-it is assumed for opportunity costs are increasing; the source of comparative advantage in this is differences in factor endowments.  Nations will not completely specialize in the product in which they have a comparative advantage.  Because of the differences in factor endowments, factors are not perfectly mobile between goods which leads to increasing opportunity costs and a bowed out production possibilities frontier.  To maximize the gains from trade, a country should produce at the point of tangency between the PPF and the trade line.  A firm will completely specialize.  Countries will export products that utilize their abundant and cheap factors of production and import products that utilize true countries factorsA countries comparative advantage uses in the production of goods that intensively use relatively abundant factorsEx: U.S. has a lot of land, true produce corn, etc. they have a comparative advantage in canola oil because of their endowments (not their labor).  Once this is determined, it should be possible to predict which goods they’ll export and import.  Relative abundance of a factor implies that in autarky its relative cost is less than in countries where it is relatively scarcer.  Relatively scarce resources are more expensive
  26. Offshoring-the relocation of service industry functions to another country
  27. Outsourcing-another firm does part of the other company’s business
  28. External economies of scale-a firm experiencing falling average production costs as its industry expands is experiencing this
  29. Internal economies of scale-The idea that an individual firm experiences a decline in its average cost of production as it increases the number of units produced.  Both of the previous models assumed constant returns to scale: When inputs doubled, outputs also doubled.  In practice, many industries are characterized by economies of scale: Production is more efficient the larger the scale at which it takes place, Doubling inputs more than doubles output, Decreasing costs over a relatively large range of output.  Economies of scale can be a source of comparative advantage
  30. Interindustry trade-United States and Canada trade hyrdo-powered electricity for Hollywood firms.  Workers in one industry benefit while other workers lose, this kind of trade raises more political objection.  Interindustry trade is comparative advantage-based trade, and with such trade a country’s relatively scarce resources endure job losses and reduced incomes.  This type of trade describes U.S.- Mexican trade.  Additionally, such trade yields smaller benefits to consumers.  On the other hand, intraindustry trade is based on economies of scale, and this type of trade, which typifies the U.S.- Canadian trade, tends to yield smaller job threats and greater benefits than interindustry trade
  31. Intraindustry trade-if countries have similar factor endowments and productivities; characterized by economies of scale and differentiated products.  Is more politically acceptable because it results in fewer distribution effects than interindustry effects.  Results in fewer income distribution effects between firms and workers in a country.  Thus, there are fewer objections to this kind of trade because workers do not feel as hurt.  The majority of U.S. and European trade is intra-industry trade
  32. Maquiladora-a form of intraindustry trade between the United States and Mexico to generate employment along Mexico’s northern border
  33. Rent seeking-Use lobbying to keep protection in place.  Use resources for nonproductive activities.  Ex: If you are an industry that wants tariffs because other countries are undercover you have to go to congress, trying to get tariff: very expensive; inefficient
  34. Product Differentiation-Each firm produces a slightly different product due to competition in monopolistic structure
  35. Monopolistic competition market structure (GRAPH)-can explain why dumping is beneficial to a firm.  A firm may have some power domestically and face a downward sloping D and MR curve, but little power internationally, so they face a horizontal demand curve in foreign markets.  Thus it makes sense for a firm to produce another unit and sell it for less abroad whenever MrABROAD>MRDOM.  Dumping is a form of price discrimination.  It will occur if foreign prices are more elastic than domestic prices.
  36. Consumer Surplus (GRAPH)-the value received by consumers over and above what they are required to pay. Everyone values each good differently.  Occurs because firms can’t charge each consumer a different price-car dealership.  What you’re willing to pay-what you end up paying.  Always above price and below demand curve
  37. Deadweight Loss (GRAPH)-The destruction of value that is not compensated by a gain somewhere else in the economy
  38. Producer Surplus (GRAPH)-the difference between the minimum price a producer would accept and the price is actually receives.  Receive benefit that didn’t cost anything to them.  Below price, above supply curve
  39. Efficiency loss (GRAPH)-A form of deadweight loss that refers to the loss of income or output that occurs when a nation produces a good at a cost higher than the world price.  Occurs on the production side
  40. Tariff (GRAPH)-is increased, the price changed domestically increases, as does the area of producer surplus. Leads to a decrease in the world price of the imported good and an increase in the domestic price of the imported goods when a country is large.  If a country is large, the imposition of a tariff will change world price.  The domestic p will increase due to the tariff.  Because the country is large, this will shift back international demand and the world price will fall.
  41. Non-tariff measures-reduce the quantity of imports and exports.  Examples: complicated bureaucracies, environmental/health/labor precautions, and technical standards, procurement rules, quotas, and subsidies
  42. Quota (GRAPH)-Quantity restriction on imports.  Similar impact.  Import Quota: generates rents that might go to foreigners.  No gain in government revenue.  If eventually consumer demand of a quota good increases, the price increases and producer surplus increases (with tariff price would stay).  Domestic firms prefer quotas to tariffs.
  43. Quota Rent-the greater profits for foreign firms as a result of quantitative restrictions on imports rather than tariffs.
  44. Voluntary Export restraint-Not always entirely voluntary.  An agreement between nations in which the exporting nation voluntarily agrees to limit its exports in order to reduce competition in the importing country.  Loosely limited by Uruguay Round.  Economic Effects: No Government revenue from quota.  Instead, foreign producers earn greater profits: quota rents because they artificially limits supply which increases price
  45. Antidumping duty-a tariff levied on an import that is selling at a price below the product’s fair value in retaliation.  Problems: Defining fair value is subjective.  Source of tension between countries.  Approximately 21 duties imposed per year
  46. Countervailing Duty-Tariff granted to U.S. industry hurt by a foreign country’s subsidizing its firms; if industry can prove.  Subsidies allow foreign firms to sell products at lower prices.  Countervailing duty seeks to counter the effect of the benefits from a subsidy.  Problem: defining a subsidy is subjective, Infrequent: 4-5 times a yea
  47. Dumping (GRAPH)-A consequence of imperfect competition.  Beneficial to firms because of monopolistic competition.  Why would you sell to foreign more?:  Because they can differentiate the price.  Incentive is higher marginal revenue.  Because higher domestic market than foreign (typically) because international markets are imperfectly integrated due to both transportation costs and protectionist trade barriers.  Means foreign sales are more affected by their pricing than domestic sales.  Firms have less monetary power in foreign markets.  Economies of scale lead to increase of international trade, lead to imperfect competition.  Imperfect competition has consequences for international trade.  Most striking result: firms do not necessarily charge same price for goods that are exported and those that are sold to domestic buyers.  Dumping: foreign country selling goods in another country for below cost.  Example of price discrimination-different customers, different prices.  Controversial issue in trade policy.  Widely regarded as “unfair”.  Subject to special rules and penalties
  48. Infant industry-new industries in developing countries initially need protection to allow them to grow in the face of foreign competition.  Problems: Difficult to predict industries which will become competitive, difficult to determine industries with falling costs, Industries may never grow up Manufacturing sector
  49. Harmonization of standards-Share common standardsm For example Electric sockets (shape), flash drives
  50. Mutual recognition of standards-We will honor your law and you will honor ours.  Keep domestic standards.  Recognize foreign standards.  Ex: minimum wage in different countries
  51. Pollution Haven- a place that attracts a degrading economic activity by offering less strict environmental regulation.  Evidence on their significance to international pollution is weak
  52. Race to the bottom-When countries with high labor/environmental standards face pressure to lower their standards in order to prevent a loss of domestic jobs or competitiveness
  53. Transboundary environmental impact-low standards in one country can degrade the environment in another country or other countries
  54. Non-transboundary environmental impact-
  55. Capital Account-record of some specialized types of relatively small capital flows
  56. Financial Account-record of the flow of financial capital
  57. Current Account-tracks the flow of goods and services into and out of the country; equal but opposite in sign to the current account.  A Current Account deficit is positive for a nation allows more domestic investment than would have been possible with only domestic savings.  Implicit vote of confidence in domestic financial markets by foreigners.
  58. Statistical discrepancy-=-1 x (Current account + Capital account)
  59. GDP=value of goods and services produced in an economy in one year.  GNP-The market value of all final goods and services produced by the residents of a nation, regardless of where the production takes place.  GNP equals GDP minus income paid to foreigners plus income received from abroad.
  60. Official reserve assets-Credit, Financial Account.  Mainly the currencies of the largest and most stable economies in the world.  Also include gold and special drawing rights.  Also used to settle international debts and central banks and treasury ministries use them as a store of value.
  61. Capital flight-a sudden flow of investment capital out of a country
  62. Sudden Stop-Shifts in expectations that can lead to sudden cessation of inflows followed by large and destabilizing outflows of financial capital
  63. Trade balance– reported more frequently than the current account because the trade balance is a less comprehensive measure of trade than the current account.  =Exports-imports of goods and services.  It is reported more frequently, but: the current account is a more comprehensive measure because it includes investment income and unilateral transfers
  64. Anti-globalization-justify trade barriers because rich countries are exploiting low income countries because the only way low-income countries can compete is with sub-standard labor or environmental regulations
  65. Kuznet’s curve-growth in developing countries is result first in falling and then if world grows
  66. Pollution spillover-actors, market characteristics, Business cycle impacts
  67. FX appreciation-if the central bank of Japan sells yen and buys U.S. dollars, the U.S. dollar will appreciate due to the demand of the U.S. dollar increasing,  imports tend to increase whenever a nation’s currency appreciates because foreign products become more expensive to domestic consumers.  If the central bank of a country with fixed exchange rates sells part of its reserve of foreign currency, the domestic money supply will decrease.  If the central bank sells some of its foreign assets, it is paid for with domestic currency, which thus comes out of circulation.  So the domestic money supply decreases.  Appreciation is a rise in the dollar price of the foreign currency.  It makes the country’s goods more expensive to foreigners, and thus exports fall and imports rise
  68. Floating exchange rate-the value of a nation’s money is allowed to “float” up and down in response to the market forces
  69. Fixed rates-the value of a nation’s money is defined in terms of a fixed amount of a commodity, such as gold in terms of a fixed amount of another currency, such as the U.S. dollar
  70. Fx intervention and impact on money supply
  71. Sterilization
  72. Monetary and fiscal policy
  73. FX depreciation-a decrease in a currency’s value under a floating exchange rate
  74. Changing the peg (devaluation)-What is difference from fixed depreciation
  75. Interest rate arbitrage-borrow rates are low, loan where rates are high, primary linkage between economies, keeps interest rates from diverging too much
  76. Fixed exchange rate-type of exchange rate system that minimizes the effectiveness of domestic monetary policy to an economy
  77. Pegged exchange rate-instead of gold, another currency is used to “anchor” the value of the home currency
  78. Gold Standard-form of fixed exchange rates, nations keep gold as their international reserve
  79. Dollarization-adoption of another’s currency
  80. Forward exchange rate-the price of a currency that will be delivered in the future
  81. Hedging-bondholders and other interest rate arbitrageurs often use forward markets to protect themselves against the foreign exchange rate risk incurred while holding foreign bonds and other financial assets.  Accomplished by buying a forward contract to sell foreign currency at the same time that the bond or interest-earning asset matures.
  82. Interest rate parity (GRAPH)-an increase in the foreign interest rate will cause the foreign currency to appreciate.  Domestic interest rate=foreign interest rate + expected depreciation.  If i* people increase demand for foreign currency, and it will appreciate.  Interest parity condition-achieving parity and impact of changes in I, i*, R and F
  83. Sterilization-the simultaneous sale of foreign bonds and purchase of domestic assets by a central bank to keep the domestic money supply constant; sterilized intervention
  84. Purchasing power parity (GRAPH)-the concept that the equilibrium value of an exchange rate is at the level that allows a given amount of money to buy the same quantity of goods abroad as it will buy at home.  Use an artificial exchange rate to make adjustments for differences in prices.
  85. Spot market-Buying or selling in the present
  86. Aggregate supply (GRAPH)-The total output of an economy
  87. Aggregate demand (GRAPH)-The sum of household consumption, business investment, government spending on final goods and services, and net exports
  88. Fiscal policy (GRAPH)-Policies related to government expenditures and taxation
  89. Monetary policy (GRAPH)-National macroeconomic policies related to the money supply and interest
  90. Multiplier effect-The macroeconomic concept that a change in spending has an impact on the national product, which is ultimately larger than the original spending change
  91. Expenditure switching-Policies designed to shift the expenditures of domestic residents.  If the problem is a trade deficit, they should shift toward domestically produced goods; if the problem is a trade surplus, they should shift toward foreign goods.  Examples of these policies are changes in the exchange rate and changes in tariffs and quotas.
  92. Expenditure reducing policy-Policies that reduce the overall level of domestic expenditure.  These are appropriate for addressing the problem of a trade deficit, and they include cuts in government expenditures and/or increases in taxes.
  93. Open market operations-The main tool of monetary policy, consisting of the buying and selling of government debt (bills, notes, and bonds) in order to influence bank reserves and interest rates
  94. Banking crisis-Occurs when the banking system becomes unable to perform its normal lending functions, and some or all of a nation’s banks are threatened with insolvency.
  95. Exchange rate crisis-caused by a sudden and unexpected collapse in the value of a nation’s currency
  96. Basel Capital Accord-A set of recommended “best practices” designed to help countries avoid banking and financial crises.  The accords emphasize capital requirements, supervisory review, and information disclosure.
  97. Intermediation-banks and other financial institutions pool the savings of households and make them available to businesses that want to invest
  98. Moral hazard-an incentive to withhold essential information or to act in a manner that creates personal benefits at the expense of the common goal
  99. Senile industry-to provide a method for older, comparatively disadvantaged to move resources to new industries without hurting the economy; Ex: Landlines, CD’s, VCR’s.  To help people with jobs in industry.  Easier to pick these firms than the infant firms.  Difficulty lies in the execution.  More efficient to directly aid firms and workers.  Four arguments in favor of trade protection: infant government, national defense, infant industries, senile industries, protect jobs, retaliation
  100. Infant government-In developed countries; tax revenue is relatively easy to collect.  In developing countries, tariffs are an attractive method of raising government revenue: Goods pass through customs.  Administrative costs low.  Can act like a corporate income tax or luxury tax: target it to certain goods.  Used when getting started.
  101. Retaliation-Loss of jobs in export industries.  Can escalate rapidly for unfair trade practices.  Problems: Can lead to escalating trade wars.  Free trade benefits all.  On the other hand: Since free trade benefits all, if a tariff now will induce others to lower theirs, all eventually benefit.  Market size=important; gives them their entire domestic market to themselves, may drive us out
  102. Production possibility curve (GRAPH)-shows the maximum amount of output possible, given the available supply of inputs.  It also shows the trade-off that a country must make if it wishes to increase the output of one of its goods.
  103. Uruguay round-Most ambitious round.  Reformed tariffs and subsidies on agricultural textiles, sensitive areas.  Birth to WTO.  Extend trading system into intellectual property rights and services
  104. Export promotion-
  105. HPAE-apparent source of most of the growth of the High Performance Asian Economies is capital accumulation through high savings and investment.  To a lesser extent, high rate of education (human capital growth).  Other factors such as macroeconomic stability, shared economic growth, export promotion, open trade policies, and rapid capital accumulation contributed to the success of these countries.
  106. Vehicle currency-a currency widely used in contracts by other countries with other countries
  107. Trade protection– the benefits of protection (higher profits and profits, etc.) go to a small group of producers and are very valuable to them.  The costs of protection (the slightly higher prices) are felt by all consumers, but it is usually a small enough price increase that is not worth their time and energy to fight it.
  108. Participants in foreign exchange markets-commercial banks, corporations, individuals, foreign exchange brokers, nonbank financial institutions, central banks
  109. Specific tariff– a fixed charge per unit of an imported good.  In the sample trade model, labor is assumed to be perfectly mobile between industries
  110. Tariff-tax imposed by a government on goods entering at its borders; will generally increase inflationary pressures, weaken balance-of-payments positions, and restrict manufacturers’ supply sources.
  111. Quota-a specific unit or dollar limit applied to a particular type of good.
  112. Embargo-to refuse to sell to another country
  113. NAFTA
  114. Antidumping laws-prevent foreign producers from “predatory pricing” or when a foreign producer intentionally sells its products in the United States for less than the cost of production to undermine the competition and take control of the market.
  115. Omnibus Trade Act and Competitiveness Act-assisting businesses to be more competitive in world markets as well as on correcting perceived injustice in trade practices; improves U.S. trade in market access, export expansion, and import relief.
  116. Foreign Corrupt Practices Act (FCPA)-prohibits American executives and firms from bribing officials of foreign governments.
  117. GATT-first effective worldwide tariff agreement and first multilateral, legally enforceable agreement covering trade and investment in the services sector.
  118. Boycott-absolute restriction against the purchase and importation.  Standards-major source of trade difficulties between the United States and Japan.
  119. History is subjective.
  120. Monroe Doctrine-No further European colonization in the New World, abstention of the United States from European political affairs, and nonintervention of European governments in the governments of the Western Hemisphere.
  121. Manifest Destiny-chosen people ordained by God to create a model society “sea to shining sea”.
  122. Reference groups-A society’s accepted basis for responding to external and internal events.
  123. United States-the greatest percentage of total energy according to the World Energy Consumption charts.  The Basel Convention banned the export of hazardous wastes by developed countries.  Trade route by sea is the newest trade route to gain popularity.  Fewer workers to support future retirees.
  124. Sovereign-Independent and free from all external control.
  125. Expropriation-government seizes an investment but makes some reimbursement for the assets.
  126. Domestication-force foreign investors to share more of the ownership, management, and profits with nationals than was the case before domestication.
  127. Local Content Laws-NAFTA requires 62 percent of parts and chassis of any cars coming from member countries be NAFTA-originated (in other words, there are limits on foreign cars and parts)

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