IR 292 February 4
IR 292 February 4 IR 292
Popular in Fundamental International Economics
Popular in INTERNATIONAL RELATIONS
This 3 page Class Notes was uploaded by Maritt Nowak on Thursday February 4, 2016. The Class Notes belongs to IR 292 at Boston University taught by James Baldwin in Spring 2016. Since its upload, it has received 30 views. For similar materials see Fundamental International Economics in INTERNATIONAL RELATIONS at Boston University.
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Date Created: 02/04/16
IR 292 February 4, 2016 Consequences of World Trade Book: The Paradox of Choice American happiness peaked in the 1950s Macroeconomics assumes more is better Gains from Trade with No Absolute Advantage Japan has an absolute advantage in many goods, but they can still gain from trade with Malaysia (opportunity costs, and therefore prices, are lower in Malaysia) Once trade opens, world price changes (for the better, because the cheaper price will prevail and everyone can produce more of what is most advantageous) EX: Korea (South), becomes a trade superpower after the war, extreme economic growth investments in education investments in health smart, healthy laborers 16 TIMES AS WEALTHY Trade allows a country to “break free” from the Production Possibilities Frontier allows for a LARGER basket of goods than under autarky access to foreign capital access to foreign natural resources larger market to sell too larger market to buy from no extra labor required global interdependencies make nations more vulnerable (ex. 2007 issues in the U.S. lead to world problems in 2008) Comparative Advantage and “Competitiveness” comparative advantage = competitive advantage when prices of inputs and outputs accurately indicate relative scarcity if comparative advantage DOES NOT equal competitive advantage, the markets have failed to correctly value prices of inputs and outputs externalities subsidies infrastructure cheap land (BLM) protection symbolic dollar value must accurately represent the inherent value of goods A nation is NOT a business national interest is best served through the most efficient allocation of resources a firm might gain a lot from subsidies or protectionist policies, but the impact on total welfare would be a decline in standard of living firms are motivated to maximize its profit but not maximize the productivity of the whole county nations do not compete like businesses, success of one country does not imply failure for its trade partners (in mercantilism, nations act like firms) success of other countries provides new and larger markets for trade and a greater diversity of goods and services in your own market Note that not everyone within an economy gains from trade trade brings structural change (change in the mix of activities that are done to make stuff) structural change means there will be winners and losers Smith: winners have a moral obligation to the losers comparative advantage is not static, the impacts change over time safe sector: healthcare? always sick people… medical tourism Malaysia: excellent facilities, lower costs. Indian physicians reading xrays. It can be exported! It can be traded! People fly into Boston for medical treatment education? disappearance of average colleges top research universities and community college/online school IT? Energy? Government? Plumbers! Electricians! Can’t outsource! INNOVATION! People who come up with new ideas are ALWAYS safe Entertainment is pretty good too Economic Restructuring economic restructuring: changes that require industries to grow, shrink or disappear Ricardian model: restructuring improves overall economic welfare but made a certain industry disappear if trade results in net gain (increase of the consumption bundle), the country is better off with trade; some sectors still lose some people lose their jobs due to restructuring, government can get the winners to compensate the losers (Smith: The Theory of Moral Sentiments, 1759) Trade adjustment assistance (TAA): extends unemployment benefits, worker retraining and temporary import tax ex: US government provides benefits and retraining for workers who lost their jobs to NAFTA (but they had to prove that was why they lost their jobs) Assumption of Perfect Labor Mobility Ricardian model assumes perfect labor mobility (workers can shift between industries without a problem) There WILL be job losses older workers less versatile workers either “do nothing” or have policy intervention most believe intervention is needed (the debate is over how much), this is not just a moral/ethical argument, but an economic one (unproductive people don’t contribute) Ford pays his workers well so they will buy his cars (the rising tide lifts all ships) Trade = Change trade always results in economic change change is often painful social inertia (it is hard to change the direction society is moving in) certain culturally sensitive products will not go away in certain countries, even if it’s cheaper to make it somewhere else
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