International Trade Notes and Exam Prep
International Trade Notes and Exam Prep Eco 361
Popular in International Trade
Popular in Economics
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Date Created: 08/28/16
8/28/16 9:05 PM Case Study 1: European Union • what does this mean to the GB? To the US? • trade dictated by distance and geography; size of national economy- tendency to trade with stronger economies • history of the EU o Read textbook o idea of a unified Europe from 1700s; tangible steps came after WWII-start a process of integration of goods, currency, and people; driven by the need for a new solution for a long problem for ex: in WWI French wanted to punish Germans which set the seeds for WWII; after WWII desire to not repeat past-best way is to integrate German economy with other European economies which would make it less likely to create war o attractive to west Germany and Italy allows for legitimacy because they were ostracized; opportunity to be treated as equals o early 1950s-world economy dominated by us; representatives of other markets realized it was a unipolar economy-US economic power peak o ranking national economies: GDP plus population so goods per person o 1950 US GDP per person was 2x Canada; 3x UK, 15x japan o drove the integration process: if countries could find common ground and speak as one they could hold greater power in relative to the US o 1951- first tangible step; European coal and steel community created- Dutch city of Hague (no change made- too broad) o ECSC successful because it was limited to the focus- 6 countries signed- France, Italy, w Germany, Benelux (Belgium, Netherlands, and Luxemburg) o ECSC agreed to yield power of price and supply(output) to a set of super national bodies; multilayers; court of justice to appeal o same set up for EU o France and Germany WWI &WWII over 12 million o France 75% permanently disabled-men o big step because after WWI France wanted retribution; these items were a part of pride o further integration: treaty of Rome 1957 § 6 countries want to further integrate their economies § reduction of barriers to trade for a wide range of industries among themselves; encourage the free flow of factors of production (inputs such as labor, capital, land); established common policies in respect to industries such as agriculture and transportation- uniform set of policies; customs union- set common barriers to trade on goods being brought in from outside the countries in the treaty, tariffs instituted- normally done by national government in percentage terms § example a commodity is worth 1000 in world market price and sold in two states France has no tariffs so its price is 1000 Italy has a tariff of 100% the price would be 2000 § tariffs way to raise national gov’t taxes § tariffs protects domestic producers of the same product § common tariff to ensure fairness § European economic community (name before EU) created among the 6 states § considered golden age of integration o 1960-73(73-recession begins, OPEC, oil prices quadruple) § EEC-GDP is growing about 4.5% yearly § uk-3.2% § UK: England, Scotland, wales, northern Ireland o 1973: community expanded to include UK & Denmaek o 1981-Greece o 1986: Portugal o 1995: Finland, Austria o total supposed to be 15 o 2004 10 more countries o 2007: Romania and Bulgaria o 2013: Croatia o total # 28 o June 23rd reversal of trend-British held a non binding referendum and voted to leave o article 50 in EU constitution-EU has to apply to leave- negotiations to leave- 2 year window; potentially relations could break down an/or be limited. Amy have to set up individual relations • monetary integration: signing of a treaty in 1992; Maastricht (Dutch town)established the guidelines for currency exchange outlined the creation of the euro timeline related to the fall of the berlin wall second half of 1989- end of communism for the most part; berlin wall falls in in 1989 o German states were going to be reunified seemed inevitable; happened quickly October 1990 o old fears resurfaced-German power would return; fear that Germany will go its own way or exit o prevent this by creating a single currency to integrate them with o 19999 currency established Jan 1 1999- euro created o 11 countries agreed to fix the value of their currency to euro § original 6 + Spain, Portugal, Finland, Austria, Ireland o Greece didn’t qualify for participation until 2001 o UK, Denmark, Sweden: opt out of currency integration o sets up that it recognizes the benefits of the common currency while others see greater cons o actual currency created in 2002 ECB had to be created first European central bank to exchange for euros in Frankfurt. Had to set up support systems; have to reduce negative consequences o listen to lecture for information about euro came into circulation o pros to currency integration: § transaction costs are lower ú led to a slight increase of tourism ú reorientation of trade; increase in trade within the Eurozone because it will be cheaper without the tariff/ transaction costs § price transparency ú fosters competition and lower prices § reduction in exchange rate risk ú DISCUSS THE BENEFITS AND COSTS OF MONETARY CURRENCY integration AND EXCHANGE RATE RISK GIVE AN EXAMPLE § Economic agents have the ability to exchange currency and buy capital for cheaper; purpose of doing this: want a positive return § possible for decline of value of currency to hurt foreigners who have invested in that country § hypothetical example: (before euro) ú luca Italian purchases French financial instrument worth ff 10000; 1 yr instrument; interest rate 10%; • need to know going rate of exchange: ff1-itl 1 • transaction cost (ignored for simplicity) • luca takes 10000 exchanges them for 1-1 for 10000 French franks • purchases instrument in ff • holds on to it until maturity • currency has remained in the same 1 yr: get the 10000 plus interest • but if the French frank had declined in value over the year then luca gets back not the expected amount in the year. His net reward would go down and he may not make a profit • ff2=itl1 • 1 yr in the future ff 11000 in itl 5500 • moral of story: decline in a country monetary value; hurts the return that the foreigner receives after the financial investment • at the start invested 10000 gets back 5500 • with the establishment of the euro it reduces this risk; it takes away the risk- now if he engages in financial transaction he doesn’t have to worry about the risk ú relation to us; high debt and bills held by other countries; their return depends on interest rate and value of dollar ú see this in south Asia with the southeast Asian crisis • cons: o loss of control over fiscal and monetary policy § fiscal: govt spending, and taxation § monetary: money supply, and interest rate § by participating in the Eurozone, countries give up substantial control of fiscal and monetary policy (happens in any fixed rate systems) § countries have to meet specific standards to enter the Eurozone and remain in the Eurozone § standards laid out in Maastricht treaty 1992; called convergence criteria ú monetary policy restrictions –this is how its controlled ú control rate of inflation-a guide line laid out saying it could be positive but within 1.5% of the 3 best preforming economies in the EU as a whole • example: 3 best(lower is the best) average currently is 1.7% qualified as long as it is below 3.2 ú interest rate within 2% of 3 best in Eurozone • this is why UK wouldn’t join Eurozone because it wants to control its own policies • policy making institution for EU is European central bank (5 members) –make monetary policies – directs the different formally independent banks what to do • bank of England oldest bank 1694 – successful because it was a conservative well run independent central bank § fiscal policies that are being controlled ú budget deficit must be controlled and 3% or less relative to your individual GDP ú national debt: total outstanding national securities • 60% or less relative to GDP • Denmark and Sweden opted out of Eurozone due to the fiscal control because then they would have to scale back on public services § 1992-1999 § 7 years between Maastricht and actual release of new currency : increase in tax rates, cut back in gov’t programs, (fiscal) and reduction in money supply (monetary) § massive turnover, people rebelling against governments due to unwanted policies being in place o as 1999 approached it was clear that standards could not be met by desired participants o rather than adhering the strict standards reworded to if the country is approaching standards then it can be included o for example Italy had a debt of 106% of total GDP following year 103% of total GDP qualifying it to join because technically it is approaching o 11 countries able to enter due to this o difficulties approached due to financial crash if the countries that entered were stronger to begin with o o Portugal, Ireland, Italy, Greece, and Spain (piigs)- worst cases- largest increases in spending and largest decreases in GDP o leaving the Eurozone or EU doesn’t give a clear solution – possibility of being ostracized picking the lesser of two evils o penalties to not adhering or going the opposite way than planned most times not enforced o dollar pressure on currency -reducing value of own currency can increase exports ; reduce imports, income tends to go up o o story of benefits and costs of monetary integration: o o Immigration in Europe o labor is internationally mobile o 1) background information regarding immigration o 2) immigration history of France and UK o 3) consider the contribution of the economic research on topic o change in demographic being contested due to large influx of foreigners o o consider the EU: o Foreign born v native born o in 2014: EU foreign born percentage =7% in 1945 1.3% o focusing on the number is misleading. Must go country by country o parallels in US 50% of immigrants in ca, tx, ny o urban phenomenon o who comes: younger than average of the recipient population o EU median age 42; immigrant average age 28 • immigration tends to lower age of population due to dependency of old age • helps support health care systems, social security • economic significance: 1. Health care costs 2. Public retirement scheme 3. Scapegoat (why is there crime? Immigrants) • • who comes-single males more likely why do they come? No single answer • push factors: political instability, drought, war • pull: opportunities • consider the countries of origin for asylum -1. Syria 2. Afghanistan, etc • recent migration is hazardous undertakings bringing up different political problems for policy makers Mediterranean sea deaths over 3,000 yearly 2014 and 2015 • debt is accumulated by individual and family, having to support families at home cost to send someone is high • • 12 out 28 countries in EU see more emigration than immigration • true for Bulgaria, Ireland, Greece, etc • • addressing illegal immigration: • 1. do nothing • 2. tighten border control • 3. grant amnesty - France 1968, 197, 1981, 1995 • 4. deportation • • treaty of Amsterdam 1999 provides legal competences for the EU with immigration • -frontex (eu border agency) charged with control and root causes • but it still remains a national issue individually • • France • legal tradition provides citizenship by right to anyone born on its soil • long history of colonial control and significant immigration groups that come are from those colonies • -jus soli (by right of soil) • - • -jus sanguine by right of blood - grant standard citizenship by right of blood or descent. If one or both parents are of given national background their children receive the right of citizenship even if they haven’t lived there • • French experience: different due to anti foreigner political presence. The national front party has been a consistent extreme face eight opposition political party • led guy le pen: immigrants blamed for increase in crime, no evidence it support, questioned the occurrence of the holocaust • • consequences of immigration inflow on the national economy • look at supply and demand. • market of labor • • • • • • in a labor market the people are the supply; as wage rate increases more people are willing to work and have more labor to supply • equilibrium value can be reached • increase in # of migrants = line moves to the right creating a new equilibrium • downward pressure on wage rate and response to that they increase the demand for labor • • accurate in theoretical terms • real world: wake of immigration inflow- don’t see any impact on wage • those individuals are not displaced but rather an increase in population • demand increases (rightward shift) • demand for goods and services increases which causes the demand for people to increase • • end of the day no change in wage rate to the relevant economies topics for today: brexit terminology: balance of payments (bop) theory of comparative advantage june 23 -vote for UK to leave European Union • Norway opted out of eu • first time a country is wanting to leave • UK was one of the first to join the EU in 1973 along with Denmark and Ireland + original 6 • tried twice before 1963/1967-refused both times by French. Charles de galle (president of France) countries get votes based on size and population • UK had 54 million France 49 million at the time – French fearful that the English would have a more powerful voice in the integration process • majority of UK public was in favor of the process but it is being represented as it has always had a problem with the EU • Europe has been used as a scapegoat by politicians-any policy issue or inequality that British politicians use EU as a scapegoat • 2013-existing prime minister d. Cameron –faced challenges from the more conservative side of his party (far right wing) attempting to appease and control by offering to hold the referendum (3 rdtime in history to make a vote like this) then part of process called remain campaign (trying to stay in eu) Cameron resigned (2010- 2016) • 650 people in house of commons 330 are members of the conservative party –leader of the most significant party gets to pick the govt • Theresa may came in as PM • uk: 4 countries: England, Scotland, wales, northern Ireland • 62% of Scotland wanted to stay in EU • rise of Scottish nationalism 2014 independence vote but to remain in uk 55% • after article 50 is invoked- uk has 2 years to negotiate the relationship between uk and eu : economics, citizenship • if not possible must do individually among each state • once the agreements are reached both sides must agree uk house of commons must agree and EU must approve • in order to get eu approval 20/27 countries must vote in favor of the future agreement make up about 65% of the eu population • • other countries wanting to leave EU so EU is going to punish; make it difficult for UK to prevent other countries from doing the same • • UK-EU ARGUMENTS • Remain: o exiting would mean trade would go down- ability to export to eu would reduce § uk most significant trading partners: 1. Us 13% 2. (Germany) EU is 44% of total § all things the same only two expectations: economy stay the same or will get worse § EU will probably add in barriers to make it more difficult to trade with UK § chancellor of exchequer (parallel to secretary of treasurer in US): George Osborne about 3 million jobs of uk tied to EU ú believes reduction of trade will lead to an approximate 6% decrease in UK gdp § can always push trade with other countries: US, China, India (further down the road, wont be able to do immediately) § highly negative argument to stay o higher prices for UK § due to barriers and tariffs in EU to outside states § British currency declining in value (English pound) § lowest point in 30 years § decline in the value of the pound will cause a raise in the price of imported goods § change in the value of currency imports go down exports go up when the value decreases because products in the country are cheaper and products coming into the country are more expensive because it takes more money due to being worth less § example: E pound 1=$ 1 ú US buying English commodity (English export) ú English buying US commodity (English import) ú ian isaac buys a commodity from the US COSTS $10 ú at the initial exchange rate will cost 10 pounds ú pound drops 2=$1 ú ian isaac wants to buy the same commodity still at $10 but now ian has to put up 20 pounds for $10 to the Englishman the price has increased ú however when looking at it in reverse it is an export boom for the English because if a US agent buys a product for $10 after the pound drops the Englishman doesn’t make 10 pounds but rather 20 pounds o EU had been providing money to the UK amount roughly equal to 8 million a year. Exiting means losing this flow of money § Part of a larger context: countries make and receive payments as members of eu § payments vary but cannot exceed 1% of GDP § the EU takes the money and used the money to support a variety of things like agriculture activities in the states part of EU § when the UK leaves EU that money inflow from EU ends but so does the payments § one of 11 out of the 28 that pay more than they get back § British rebate: m thatcher debated this when joining EU said not a lot of farmers so the money being paid to EU isn’t really helping the UK so what is done that a formula is created to give the UK money back due to not having high agriculture ú this causes UK to pay about 4 billion less than they generally would if they didn’t have this • Leave o Doesn’t have to make payments – gets to keep the money, no longer a burden on British taxes : helps the elderly (get to keep their money) looking short term § non eu members pay to get access to eu market European economic area i.e. Switzerland and Norway § Norway wants to be able to sell its good so it pay roughly under 5 million dollars yearly to sell to the EU market ú Norway also has to accept free flow of labor (big reason UK wants to leave) § if UK wants access to market they will have to pay. § in a technical sense uk will stop paying to EU but still have this yearly payment for access o British concerns about immigration § may 2004- ten additional countries joined EU (from primarily eastern Europe) § high influx of people from Poland 2nd highest population in UK § created an anti immigrant reaction § leave campaign exploited these feelings § if we leave EU, we’ll be able to better control our borders, stricter control on who enters § annual inflow 2015 333,000 people about 184000 (about 50%) from EU; 188,000 non EU, 39000 UK citizens leaving § Theresa may (current PM) trying to make max immigrants inflow 100,000 - not just reducing EU immigrants but also rest of the world § UK has had greater control over borders than rest of EU because most countries signed Schengen accord (almost erases borders)- eastern 13 Europe states § fear that with the recent increase of immigration there will be an increase of terrorism o by leaving the EU UK would no longer be subject to EU basic law § acquis: extends over 100,000 pages in length § dis-ingénuen argument because still need to follow EU rules to trade with EU ú ex: GMO Content monitored more than .9% gmo needs to be labeled • same arguments work for countries wanting and not wanting to join EU • • EU-MONEY, PEOPLE, AND TRADE • • Theory and Terminology! • • balance of payments (bop): composed of 3 things: current account, capital account, official reserve/transactions account o current account is made up of exports, imports, net unilateral transfers, net investment income-want to have more exports than imports. Trying to keep it balanced-influenced by level of income both domestic and abroad o value of currency, income, and trade barriers affect how well the exports and imports happen o net unilateral transfers: one directional movement into and out of the country: private remittances (private person provides money for individuals outside the state), and foreign aid flow o net investment income: largely positive; companies make more money abroad than foreign investors make in the US o most times these two cancel out o dominated by exports and imports o balance of trade (X-M) GOAL IS TO HAVE THEM EQUAL. X>m = surplus or x<m = deficit o o financial account § capital inflows and outflows § inflows: develops when a foreign economic entity buys a financial instrument from host country; i.e. a china person buys a US treasury bond § outflow is the opposite. § three ways to arrange: cancel out=balance § inflow greater than outflow = surplus § inflow is less than outflow = deficit • recently in US deficit in current account and surplus in capital account • increase in the value of the dollar means foreigners make more on their financial instruments • • official reserve transaction account • assets held by the central bank- adjusts the differences between capital and current account • • what determines who we trade with? o Size and distance o example two countries I AND J o TIJ is the trade volume between the two o TIJ = A1 * YI *YJ / DIJ o Y=income o D= distance o if the Yi or Yj goes up the greater the trade o wealthier states most likely trade with wealthy states o US 15 largest trading partners 10 of those are high income markets economies o greater the distance less likely to trade o this is called the gravity model of international trade reflection of newtons theory of gravity : size and distance = pull o A1 = history of countries, connections, colonies, etc technically all the outlier information. Since the 1500s and mercantilism nation states have wanted to compete they gain territory not just for its resources but to prevent others to have resources this still occurs because states still institute tariffs and etc to prevent goods to other countries new thinking of trade during the classical period-adam smith 1776 wealth of nations wealth= degree of specialization division of labor = size of the relevant market single most important theories: not smith himself but the people who followed him: david ricardo self made millionaire developed the theory of comparative advantage writing without any data or numbers – about a century before accounting systems are brought in (1920s) theory is super simplified due to not having numbers and is purely theoretical – theory is here to push free trade ex: there are 2 countries-Us and Canada produce two commodities: bread and steel assume 1 in put: labor (not free movement) assumed full employment exists us Canada bread 2 loaves 3 loaves steel 3 tons 1 ton production possibilities frontier neither possibility is unattainable unless on line assuming the nation is at full employment if it is under the line then the state has unemployment. This graph shows a state without trade ricardo argues that each country should specialize what they should do best then trade =higher efficiency and more profit what has to be looked at though to know what the trade will look like- opportunity cost- us – for 1 ton of steel it is giving up 2/3 of a loaf of bread type of trade to make: 1 ton of steel for 2 loaves of bread red line is the exchange line where when two countries are trading list of possibilities outside the ppf this theory is displaying absolute advantage for both countries-not generally the case what is the case when one country is doing everything better even though the english market was the strongest 1850. it made sense to engage in free trade because getting more than what it is making on its own you should be able to create an example of absolute advantage and comparative advantage create a numerical example with a graphical that explains absolute and comparative advantage – take the example put it in a graph and explain whats going on next significant theory hechsher and ortline (continues hescsher work)- model they developed 2 countries, 2 goods, 2 factors of production addresses question where does comparative advantage come from focus on 2 inputs capital and labor US EGYPT CAPITAL 50 2 LABOR 150 10 FOR THE US FOR EVERY 1 PIECE OF CAPITAL IT’LL NEED 3 PIECES OF LABOR EGYPT FOR EVERY 1 PIECE OF CAPITAL IT’LL NEED 5 PIECES OF LABOR IN COMPARISON THE US has a larger relevant amount of capital à US is more capital intensive egypt is relatively labor rich HO suggests that CA derives from these two countries in the US its advantage lies in industries with more capital US EGYPT BREAD 2 STEEL 3 trade off between the two is 2/3 HO model this can be a point on the HO ppf curve saying that at some point to make 2 loaves of bread it will have to give up 3 tons of steel it gets expensive to transfer resources from one commodity to another which is why the graph bows for every time you transfer resources from lets say steel to bread you are giving up some amount of steel to produce more bread. there is a trade line where individual countries can specialize in what they do best and reach a combination of the products that was unattainable before. when you think about the more modern version of trade theory they all start with ricardo’s theory as the basis then add in complexities and adding realism specific factors model (not on midterm) 2 countries x producing 2 goods x with 3 factors of production 3 factors: labor, capital, land ^C cloth: Q = f (lc, k) food: Q ^f = h (lf, t) in this model these factors of production cant move, labor is mobile total size of labor = lf+lc total product (cloth) consistent with a traditional tp model, that if in the short run you add an increase of a factor then eventually the contribution of those additional units decline l=lf+lc either end will tell how many people there are in total any point on the line will tell how many people in each but the total stays the same graphical manipulation: put all the graphs together, rotate to fit based on the given quantities that are set the point in q1 is the max utilization of the labor market making it the ppf curve – do the points multiple times will create a ppf curve in the end these are different combination of the two products people have access to in the absence of trade labor market, wage, marginal products, relevant markets determine where ont eh ppf curve a society should land on. demand for labor is a derived labor so for example: increase in demand for food, food prices rise, so food workers are needed more this form allows to talk about benefits AND costs Specific factor models theory of competitive advantage is used by more modern economists wage = price x marginal product (mpl) marginal product of labor: contribution each additional person makes to the total product labor total product mpl 1 8 2 25 17 3 50 25 4 60 10 diminishing marginal retur: making less than your predecessor ex: price= 1 wage=priceX mpl 10=1x 17 17-10 =7 profit for company trying to figure out what the max number of workers to bring in for a profit wage<p x mpl makes sense to hire additional labor up until they are equal labor demand goes up wage> p x mpl labor demand goes down Protectionism Barriers of trade: tariffs and non-tariff barriers (NBTs) Tariffs: typically stated in percentages and leved at the national level; creates the tax revenues Protects domestic producers who aren’t competing at the world market NTBs- quotas not in direct relation to price but does create an absolute limit on the # of commodities coming into the country; drove multi-national industry ex: foreign auto companies setting up in the US avoid limits on production NTBs: local content requirement: saying that a specific amount of production or materials must be locally Downside to tariff protactions: doesn’t occur in a vacuum; retaliation will occur from other countries Ex: great depression: 1929-39 establishment of tariff in the US called smoct haulet rariff 1929- eggs us exporting nearly 1 million eggs to Canada post tariff: Canada triples tariff of eggs from US 1932: US exporting only about 8 thousand eggs US exports of eggs to Canada fell by 99% When a tariff is in place: there is dead weight loss due to higher prices, consumers lose surplus due to higher prices and the reduction between how much they are willing to pay and are actually paying (view study guide for more details) Due to barriers: partnerships exists Transpacific partnership: 4 prime countries now 12 states : including: Peru, Chile, Austria, New Zealand, Austria, Japan, Malaysia, Brunei, Vietnam, Singapore, Canada, US • Key features: reduction of tariff rates, standards in respect to environment, intellect, 8/28/16 9:05 PM 8/28/16 9:05 PM Discuss the consequences of tariffs and use a graph The first effect from the tariff is the size of consumer surplus falls. The higher price means that the surplus declines making consumers worse off because they have to pay more. On the graph this is sections AF. On the original graph it is sections A +B. This leads into the second effect which is that the price rises for the consumers. This reduces the consumer surplus which is determined by how much the consumer is willing to pay for a product vs how much they are actually paying. The third effect is that the producers surplus expands from C on graph one to C + H on graph two. The producers surplus is determined by the minimum price for the good vs the price the producer is actually selling it for. Fourth, the price paid by producers domestically rises. Prior to the tariff sections AF where the consumer surplus but after a tariff is incorporated only C is the producer's surplus. The effect can be seen on section E of graph 2, which shows the tax revenues which is determined by the volume of inputs or Q4A3, it can also be looked at as imports x tariff = Tax revenues. E becomes redistributed from consumer surplus to government funds. The 6th effect is that D+F become deadweight losses that are driven by the fact that domestic producers pay higher prices and these two sections are simply lost. When instituting a tariff it is not a zero sum game, tends to leave society worse off. Consider the consequences of the U.S. applying a quota to imported sugar. In the course of your answer, state the definition of both consumer and producer surplus. Use a graphical framework in your answer. A quota on sugar would limit the volume of sugar that can be imported into the U.S. If we say the quota is 3 million tons we can easily put this into a supply and demand graph. A state inputs a quota as a way to protect domestic producers but limiting the amount that can be imported. The quota is not a random number but actually fills a gap that may exist in the industry. For the U.S. sugar industry, its domestic producers can produce 2.7 million tons but the demand for sugar in the U.S. is 5.7 million ton, thus the quota covers that difference. Unlike in an industry without a quota, the quantity demanded is set first then the price to keep it balanced. The quota price tends to be above the world market price because if the state followed demand at the world market price it would be closer to 7 million tons while the domestic producers would only be able to contribute about 1.8 million tons. The quota forces the domestic producers to increase their supply and fosters some competition. Over all, after the tariff the consumer is worse off. Originally when looking at the graph the consumer had the areas of AD. the consumer surplus is determined by the price in relation to the surplus and world market price. It is the difference between what the consumer is willing to pay versus what the consumer actually pays for the product. Section A is is transferred from the consumers to the domestic producers. Section C shows the benefits for foreign producers because they are able to sell their product at a higher cost than the world market price and are making a profit. These sections of producer surplus are determined by the minimum amount the producer is willing to sell at and the actual price the product is being sold at. B and D are considered deadweight loss because when the tariff is imposed, the economy is no longer working as efficiently as it could be and that extra pieces of variables are lost. Using the specific factors model, consider the consequences for the distribution of income associated with an increase in the export of one of the included goods. Use a graphical framework in your answer. Are these results consistent with the experience of the Singapore economy since 1965? How would one put that conclusion into evidence? In the specific factors model there are 2 countries, 2 products, and 3 inputs: land, capital, and labor, involved. Land and capital are immobile factors while labor is mobile. Any transfer of these inputs can cost the producers. According to ricardo the best way to counter this is by specializing on one good and trading that for another good from a different country. The demand for labor is determined by the number of workers and the value of the product they create. This also determines their wages. When prices change and manufacturing changes, it leads to an equal change in consumer prices. The wage rate changes in terms of these new prices but the actual wage has not changed. In an odd way Singapore does reflect these results because it does have a high income inequality due to international trade and specializing on various industries over others. This can easily be seen through Gini’s Coefficient (GC)= A/(A+B). If GC approaches 1 it show an increase in inequality of income while if the GC approaches 0 it is a decrease in income inequality. The GC for singapore is around .6 making it higher than even the United States. How did Singapore create a successful economy?/ What are the factors that affect Singapore’s growth? At first it followed the policies being pushed by the big economists at the point of independence, this included having barriers and importsubstitution. However the government quickly noticed this was not working and changed its tactics. Beginning in 1965, singapore opened its borders to free trade. Tariffs were eliminated and other barriers were reduced. Singapore instantly started to attract multinational corporations by making arguments of cheap labor and minimal barriers. This was a positive step because the state did not wait for countries to come to them but rather sold themselves as an attractive investment. The U.S.’s outward processing tariff actually benefitted Singapore because this tariff allowed U.S. firms to export materials to another country and when imported back only charge comes from the how much value the product gained at the foreign site. x+y=b where x= raw materials or initial value y= added value at foreign site and b=total value. In this equation the U.S. only has to pay the tariff for section y. Singapore has also had a very conducive environment for businesses to flourish. One of the main reasons is that it broke up the power of the labor unions. The ones that were too powerful were outlawed and the rest were weakened to point where they had no power. No choice over wages, promotions, transfers, firings, or work conditions. Another fact was that at the time about 3% of the population was foreign born. Singapore wanted to attract corporations that required high skill and to do that they opened the borders to high skilled workers. The government was highly supportive of economic progress partially because it has been highly stable since 1958 and focused on the idea of clustering internally and externally. Internally the government took it upon itself to give funding to sectors that were being neglected or were not attracting funding but the government thought was important. For example, the airline industry, shipping, and construction. One the biggest shipping companies now Neptunes oriental line is from singapore. External clustering became important for multiple reasons. First it wanted to establish itself as a regional hub in S Asia partially because by 1972 income was rising and due to it multinational companies were leaving. Also due to its location at the straits of johor it had a perfect location for ships to dock and increase trade. The main purpose of these clusterings was to create relationships with neighboring countries. However all of this came with some social and political costs. The government is run at a more patriarchal fashion and the freedoms of press and speech are limited. Singapore is evidence that democracy is not needed for a successful economy. There is still a trade over of information between malaysia and singpore that keeps the people informed.in exchange for the contraints on freedoms, the people are gaining a growing economy, higher wages, and more jobs. In singapore there is no unemployment compensation or government aid in order to produce a high work ethic. In a sense working gets them the money to survive so everyone will work. How does Singapore conform to the models of economics? (gravity model and comparative advantage) The gravity model shows that income and distance play as factors of international trade. The most significant trading partners of Singapore are China (wealthy and close), Hong Kong(wealthy), Malaysia (Distance) Indonesia (Distance), and the U.S. (wealthy). The comparative advantage generally looks at labor, capital, and raw materials to determine which country has the comparative advantage. Singapore shows that a country can create its own advantage unlike it was previously thought by having an active government and participating in the economy. Illustrate intra industry trade According to classical models of economics and even some modern one, a country specializes when it wants to trade with another country. But this is not the case in reality. Virtually half of international trade is intra industry trade (IIT) which means a country will actually imports the same good they are exporting. The Grubel Lloyd Index (GLI) helps model what is happening. The GLI # = 1[(ximi)/xi+mi] where I just stands for industry x=exports m=imports. When a country is not importing the same product as it is exporting the GLI# will be zero. But if they are importing and exporting the same product both X and M are going to positive and be closer to 1. In terms of Singapore, its GLI # is .85 because it is easier for firms to exploit economies of scale which is when as quantity increase cost/unit decreases. What are clusters and why do they occur? Clusters are hubs of economic activity that occur due to a tendency to produce near each other. Major examples are the silicon valley and hollywood. Many times in a cluster there is knowledge spillover meaning that having the same location for an industry allows people to network and gain new information which can help the company in the end. Also there is a pooling of labor. For example, 2 firms doing computer animation have a choice of where to locate themselves. Either in two separate cities or in the same city.if production occurs in only 1 city than the labor force will all be there together if they are in separate cities there is a change that the pool may be unevenly distributed and labor may be unlikely to move. Also due to some economies having times of boom and relaxation having a pool of labor can allow the firms to use as much labor as they need and trade off. Discuss the arguments advanced in support of the Remain and Leave campaigns in the runup to the British referendum held in June 2016. In the course of your response, develop a detailed numerical example that illustrates the impact the decline in the value of the British pound on British imports and exports. Both the arguments for Remain and Leave in the British referendum that was held in june 2016 were negative arguments makings it difficult for the people to understand which arguments were meant for each side. ● On the remain side the arguments included that exiting the EU would mean trade would go down because exports to the EU would be reduced. When looking at the UK’s most significant trading partners the EU is 44% of that total. If all things are the same, there are only two possibilities of what can occur: the economy will either stay the same or get worse. The EU will probably add in barriers to make it more difficult for EU members to trade with the UK making prices rise. The UK can push trade with other countries but that will not be able to happen instantaneously so there will be a drop in the economy. ● The second major reason the UK should remain according to the Remain campaign is that prices will rise for the UK due to barriers and tariffs in the EU to outside states. The British currency will also decline. The change in the value of currency will cause imports to go down and exports to increase because the products the UK is shipping out will be cheaper due to the currency’s value being lowered. For example: imagine 1 pound =$1. Ian a British man buys a US commodity for $10. For Ian it takes 10 pounds exchanged for $10 to buy the commodity. But when the pound drops, let's say it becomes 2 pounds = $1, when Ian wants to buy that same commodity, he has to exchange 20 pounds for $10 making the import cost more. Looking at it from the other perspective, john an american wants to buy a commodity for 10 pounds. He takes $10 and exchanges it for 10 pounds and buys the commodity. But when the pound drops and now the exchange rate is 2 pounds =$1, john only has to exchange $5 for 10 pounds and buy the commodity; making UK exports cheaper. ● The third reason the Remain campaign gives is that the EU has been providing money yearly, roughly 8 million. The larger context to this is that all countries a part of the EU make payments and receive sums based on their economy. When the UK leaves those payments stop ( they did not focus on the fact that the inflow of money stops as well). The Leave campaign also gave a negative stance to it. The leave campaign focused on not making the payments to the EU which means there is a reduction on British Taxes, makes the elderly population happy, they get to keep more money. But what is neglected is that non eu members must pay to get access to the EU market. The british can also handle their concerns about immigration. When in the EU all boarders must be open, but if they leave the EU they get greater control over the borders and create restrictions. Lastly by leaving the EU, UK would no longer be subject to EU basic law but what is not mentioned is that if they do want to trade with the EU they still need to follow those basic rules. State the gravity model of international trade. Explain how each of the component parts of this presentation help explain international trade flows. In the course of your response, note the accord between this presentation and British trade flows. The gravitational model of international trade is a reflection of newton’s theory of gravity where size and distance determine the pull of gravity. In terms of international trade, this means the size and distance of the states. For example, there are two states I and J.TIJ is the trade volume between the two states. TIJ= (A x Y 1 )/D . In this formula Y= income, D= distance, and A= the history, connections, and other relations such as colonies that the two states may have in common, it is technically all the outlier information. If the income of state I or J increases so does trade. When looking at current countries such as Britain, it is noticed that wealthier states are more likely to trade with wealthy states. For example out of the 15 of the US’s largest trading partners 10 of them are from high income market economies. Britain trades with the other states within the EU, previous colonies, and other nations. When looking at Britain's trading partner many of the economies are wealthy such as the US and Germany. With this connection to the states when one economy does well so does the other. If we look at the crash that occurred in 2008, when the US economy plummeted, so did Britain's. If Britain’s leaves the EU for another example they lose the wealthy countries they trade with and causes TIJ to drop in the end. Discuss the benefits and costs of establishing the Euro/ currency integration. Explain the Exchange rate risk and give an example Pros: transaction costs are lower because you dont have to exchange money when investing in a foreign company and/or traveling. This has led to an increase of tourism slightly due to people being more likely to travel when less work is involved i.e. no longer exchanging money. It has caused a reorientation of trade because it increases trade within the eurozone because it is cheaper due to no transaction costs or tariffs. For example, an italian can buy something from france for 10 euros. But if the italian were to get the same object from the United States they would have to pay the US price plus any transaction fee for the conversion plus any tariffs instituted. Monetary integration has also allowed for price transparency so for example a gallon of milk in italy is 3 euros and in france it is 2 euros. It is obvious which one is cheaper. The price transparency fosters competition which in turn lowers prices. Lastly it reduces the exchange rate risk (ERR). ERR is the fear or risk of losing capital when investing in another country. Economic agents have the ability to exchange currency and buy capital for cheaper, the purpose of doing this is to earn a positive return. The risk is that if there is a decline in currency of the invested country, the foreigner who invested will be financially hurt. In a hypothetical example, luca an italian wants to invest in a french financial instrument worth 10,000 franks (ff). The exchange rate is 1 ff = 1 lira (il). Luca make the exchange assuming there is no transaction costs and invests in the french financial instrument where it stay until maturity (assuming it is 1 year). Assuming the exchange rate has stayed the same, and there was a 10% interest rate on the financial instrument, luca will make 11000 ff (10000+10% interest). After the exchange, he has 11,000 il. However if during that year that year the ff devalues and the exchange rate becomes 2 ff= 1il, luca will have 11,000 ff after the maturity and after the exchange rate is done, luca will only have 5,500 il. The monetary integration in the EU has taken away this risk so luca can invest in france without fear of losing capital. A real world example of this could be the US high debt that is held by other countries. The return those countries make on their holdings is determined by the interest rate and the value of the dollar. Cons: the loss of control over fiscal and monetary policy is one of the major aspects that has deterred some countries from joinin the EU. Countries have to meet specific standards laid out by the maastrich treaty in order to enter and remain in the EU. There are monetary policy restrictions that control the rate of inflation. There is a guideline that lays out the max one’s inflation can be in relation to the 3 best performing states already in the EU. Along with the inflation rate, the interest rate is also limited through monetary restriction. Similar to inflation the state must be within 2% of the 3 best states in the Eurozone. The way fiscal policy is controlled is by controlling the budget deficit that must 3% or less relative to that state’s GDP. The national debt must be less that 60% relative to the GDP. These processes would mean that countries must give up public services, government programs, and raise taxes. These restrictions actually caused massive turnovers in government and people rebelling against the government due to unwanted policies being in place. These strict standards were highly difficult to reach up until they were laxed and the rule became as long as the country was approaching the appropriate percentage they could enter. Difficulties approached due to financial crash, if the countries had been stronger when they entered the EU they could have been more successful. A major example is Italy who at the time had a debt of 106% relative to its GDP and even though it was approaching the 60% it was far and the state was too weak to handle any financial changes. Create a numerical example with a graphic that explains absolute and comparative advantage Absolute advantage refers to when one country is able to produce more with a lower input at maximum capacity than another. Comparative advantage was developed by David Ricardo. Theory is meant to push free trade. For example there are 2 countries US and Canada that produce bread and steel. Let’s assume there is only 1 input: labor (which is not free to move) and let’s assume full employment exists Ricardo argues that countries should specialize and gain that absolute advantage in order to trade which would create higher efficiency and more profit. The opportunity cost for the example above for the US would be 1 ton of steel mean the state gives up ⅔ of a loaf of bread, the US will be looking for a trade where it can receive more that 1 loaf of bread while for canada 1 ton of steel means giving up 3 loaves of bread so they are looking for a trade where they do can receive more than a ⅓ of a loaf of bread. In the end the type of trade they would make would be 1 ton of steel for 2 loaves of bread. This example shows absolute advantage by showing how the US dominates the steel industry while Canada dominates the bread industry. It also shows comparative advantage because through the trade, they both receive a profit and are benefitting from the trade. In the ppf curve shown next to the table, the original black line would have been US ability to produce with its own labor market, the redline outside the ppf curve shows there are more options and greater profit available to the country, if they are willing to trade.
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