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International Trade

by: Erica Kugler

International Trade PSC 204- Dr. Chyzh

Erica Kugler
GPA 4.0
International Relations
Dr. Chyzh

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Notes over International Trade.
International Relations
Dr. Chyzh
Class Notes
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This 12 page Class Notes was uploaded by Erica Kugler on Friday February 27, 2015. The Class Notes belongs to PSC 204- Dr. Chyzh at University of Alabama - Tuscaloosa taught by Dr. Chyzh in Spring2015. Since its upload, it has received 161 views. For similar materials see International Relations in Political Science at University of Alabama - Tuscaloosa.

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Date Created: 02/27/15
International Trade 0 Puzzle presenceabsence of protectionism among different countries 0 Why do some countries have protectionist policies while others do not 0 The world today is more free in terms of trade than it has ever been in the past Core of Analysis 0 Free trade is good for everyone 0 Barriers to trade hurt economic growth 0 Trade liberalization free trade creates winners and losers o The losers are most often the producers of products 0 International institutions can help wtrade policy cooperation Helping the Loser o 2 ways to help the loser the product producers of free trade 0 Subsidize the producers o Restrict the importation of foreign products 0 subsidization reduces the costs of production so the producer benefits 0 import restriction raises the price of the commodity I Consumer is hurt because heshe has to pay more I Producer benefits because the consumer has to buy hisher product 0 Dead Weight Loss result of protectionist policies quotrepresents the efficiency losses to society 0 Lose in efficient production by the producer due to trade protectionism tariffs I Tariffs cause the price of a commodity to increase This causes consumers to demand less of the commodity because they do not want to pay more for it This decline in demand means that the producer will produce less making him less efficient than what he could be if the tariff wasn t in place 0 How to get subsidies collective action problems 0 Producers are small in number Consumers are large in number I It is easier for producers to mobilize and legislate for protectionism and subsidies than for all the consumers to mobilize and legislate against protectionism Since producers can mobilize easier they are more likely to have their demands met This means that the producers can keep getting subsidies have the importation restrictions and force consumers to buy their domestic product at a higher price 0 Why keep the subsidization policy 0 Pro keep domestic jobs I Allowing importation of foreign goods would put producers out of business because the foreign goods would be cheaper and consumers would thus buy the cheaper foreign goods than the more expensive domestic goods History of Economic Theory 0 Adam Smith 0 Specialization or Division of Labor I Idea that it is better to divide up the production process into different steps and have one person specialize in one of those steps 0 Result increase productivity and efficiency 0 Old way one worker makes 1 item in 1 hour 0 New way three workers make 15 items in 1 hour 0 Result would need access to new or larger markets to meet the larger production values 0 Need to be able to sell the increase in products produced or else they are of no use What is good about trade 0 International trade depends on quotComparative Advantage 0 Comparative advantage states gain the most by specializing in producing and exporting the things that they make most efficiently o Protectionism is harmful o It allows for the development of inefficient industries o It increase the price of commodities I This leads to a decrease in demand that inevitably hurts the producer so there is no economic gain in the long run Economic Theories of Trade gt Liberalism vs Mercantilism o Liberalism 0 Free trade 0 Specializationdivision of labor 0 Mercantilism 0 Based on the political philosophy of Realism benefit the state at any cost 0 quotautoarkyquot quotselfreliance domestic production of everything I NC trade Liberalism 0 Absolute advantage producing a good more efficiently than any other country 0 Comparative advantage producing a good at a lower opportunity cost than another country 0 all countries have a comparative advantage in something but not all countries have an absolute advantage in something Comparative Advantage Chart Cloth labor hoursbolt Wine labor hourbarrel England 15 30 Opportunity Cost for cloth is Opportunity Cost for wine is 1 bolt12 barrel 1 barrel 2 bolts Portugal 10 15 Opportunity Cost for cloth is 1 bolt 23 barrel Opportunity Cost for wine is 1 barrel 15 bolts o If England and Portugal do not trade 0 England I It takes 15 labor hours to produce one bolt of cloth I It take 30 labor hours to produce one barrel of wine 0 Portugal I It takes 10 labor hours to produce one bolt of cloth I It takes 15 labor hours to produce one barrel of wine 0 thus the absolute advantage for cloth goes to Portugal The absolute advantage for wine goes to Portugal I Why Because in both instances Portugal s cost of production is less 10 is less than 15 and 15 is less than 30 0 Analyzing Opportunity Costs 0 England I Cloth 1 bolt to 12 barrel I Wine 1 barrel to 2 bolts 0 Portugal I Cloth 1 bolt to 23 barrel I Wine 1 barrel to 15 bolts 0 thus the comparative advantage for cloth goes to England The comparative advantage for wine goes to Portugal I Why To make one bolt costs England 12 barrel while it costs Portugal 23 barrel 12 lt 23 To make one barrel costs England 2 bolts while it costs Portugal 15 bolts 15lt2 0 Absolute advantage belongs to the producer wthe overall lowest cost per product value 0 Found by looking at the numbers given like 15 30 10 15 0 Comparative advantage belongs to the producer wthe overall lowest opportunity cost value 0 Found by doing 1 product of other product 1 bolt 12 barrel where 1530 12 Supply and Demand Supply and demand graph illustrates how an increasedecrease in the supplydemand of a good can affect its price 39039 0 0 l I t VAN H 239 Supply is the green line Demand is the red line Any change to the supply or demand line is the purple line Price yaxis Quantity xaxis Moving the supply line to the right supply increases to the left supply decreases Moving the demand line to the right demand increases to the left demand decreases Moving upward on the green supply line supply increases downward supply decrease Moving rightward on the red demand line demand increases leftward demand decreases Result of changes in the supplydemand line and commodity s price 0 Increase supply gt price decrease and quantity increases 0 Decrease supply gt price increases and quantity decrease 0 Increase demand gt price increase and quantity increases 0 Decrease demand gt price decrease and quantity decreases Purine ESE re main Eu ppin Price Eeiiing Equilibrium Price Eeiiing 52E Eonage of Suplg J 2 m It maintitty of Goods 0 This graph shows the effect on price and quantity with a change in the equilibrium 0 At equilibrium the price is 5 and the quality supplied by the producer is 5 units I if the price goes down to 2 the gray equilibrium line would hit the blue supply line at 2 and hit the green demand line at 8 Since the price went down this hurts the supplier less profit per unit but benefits the consumer pay less per unit The quot2 units represents the amount of the product the supplier is willing to produce The quot8 units represents how much of the product the consumer demands The consumer s demand outpaces producers supply which is why you have a supply shortage I If the price goes up to 8 the gray equilibrium line would hit the blue supply line at 8 and hit the green demand line at 2 Since the price went up this helps the supplier more profit per unit but hurts the consumer pay more per unit The quot8 units represents the amount of the product the supplier is willing to produce price price produce more get more profit The quot2 units represents how much of the product the consumer demands The suppliers production out paces the consumers demand so there is a consumer surplus Supply and Demand wAutarkv NO trade Price l Supply Equilibrium 9 price i Seller surplus I 5 Demand i Quantity Equilibrium quantity 0 Buyer surplus quotConsumer Surplus monetary gains by the consumers 0 Full range of savings between what a consumer expected to pay and what heshe actually paid I The difference bwn what you value the item to be priced at the actual market value price you pay for it o it is the region ABOVE the equilibrium line in the triangle formed by the yaxis the supply line and the demand line 0 the size of the Consumer Surplus can change if there is a change in supply or demand 0 Seller surplus quotProducer Surplus monetary gains by the producers 0 Full range of prices of what a producer expects to sell an item for I What a producer expects to sell the item for and what heshe actually sells the item for o it is the region BELOW the equilibrium line in the triangle formed by the yaxis the supply line and the demand line 0 the size of the Producer Surplus can change if there is a change in supply or demand 0 As the price of an item increases the supply for it increases 0 As the price of an item decreases the demand for it increases Supply and Demand wtrade F39w J p 3930 Q T Q Don t let all the letters overwhelm you 0 Pretrade o Equilibrium is at Po and Q0 0 The triangle formed by A and B is the consumer surplus o The triangle formed by G C and D is the producer surplus o Wtrade o Allowing trade to occur lowers the price of the commodity so the equilibrium line moves down in price to Pw The new equilibrium creates to theoretical quantities Q0 the leftmost one represents the quantity the producer will supply price is less less profit supply less Qt the rightmost one represents the quantity the consumers demand price is less pay less demand more Because this trade action benefits the consumer the consumer surplus region expands while the producer surplus region shrinks I The new consumer surplus region is A B C D E and F I The new producer surplus region is G o This graph demonstrates the winnerloser consequence of trade 0 The winner is the consumer gt price is less so spend less money 0 The loser is the producer gt price is less so less profit made Tarriffs o Tariffs is a protectionist policy 0 Tariffs produce dead weight loss DWL inefficient production of an item 0 2 sources of dead weight loss I Production of inefficient goods I Consumption of inefficient goods A D so 3 39 E I A O PM I v A SM l lamquot P 1 W G F i c B 3 I A l l L O Q Q Cb 339 Q Quantity 0 Original equilibrium wo trade Pd and Q0 0 Allowing trade moves the price down to Pw and produces to theoretical quantities of Q2 how much the producer will supply and Q1 how much the consumer will demand 0 Consumer surplus region expands and producer surplus region shrinks 0 Since the price is lower the producers are hurt financially To help them the government institutes a tariff on all imports of foreign products that are similar to the products the producer supplies 0 Adding a tariff raise the commodity s price to Pd1 The new theoretical quantities are Q4 how much the producer will supply and Q3 how much the consumer will demand Because the price is higher the supplier can make more of a profit so heshe will increase the amount supplied But because the price is higher the consumer will demand less of that product 0 Consumer surplus region shrinks and the producer surplus region expands I But compared to the original equilibrium the consumer surplus is greater than its original size and the producer surplus is smaller than its original size 0 Dead Weight Loss triangles EFG and ABC 0 Triangle ABC represents the quotconsumption of inefficient goods By adding the tariff consumer s demand moves from point B to point A This is a backward move on the demand curve and is thus a loss 0 Triangle EFG represents the quotproduction of inefficient goods By adding the tariff the producer s supply moves from point G to E But the consumer is less likely to buy the good at the higher price so less products are bought nonsold goods loss 0 Tax Revenue by the government rectangle formed by ACFE Why countries tradeexportimport what they do 0 HeckscherOhlin approach 0 A country s factor endowments determine its comparative advantage I 4 factors that determine comparative advantage 0 Land gt agriculture 0 Labor gt unskilled labor 0 Capital for investment gt equipment money 0 Human capitol gt skilled labor I Countries will export goods that are intensive of the factors they have in abundance 0 Ex a country wa lot of good land land factor will focus more on agriculture production and export food crops I Countries will import goods that are intensive of the factors they do not have 0 Ex Japan does not have a lot of good land so it will import food crops But Japan has a skilled labor force human capital so it will export technology cars etc o Other nonHO explanations for why countries trade what they do 0 Common currency ex euros 0 Domestic interests 0 Hostility or alliances I Can use trade patterns to decrease the likelihood of alliance abandonments Trade Restrictions o Protectionism the use of specific measures to shield domestic producers from imports o It is the opposite of free trade 0 Trade barriers impediments to importation of foreign goods 0 Tariff tax on imports levied at the border and paid by the importer o Quota limit on the quantity of a foreign good that could be sold domestically I Quantity limit on imports o Nontariff barriers to trade regulations targeted at foreign goods I Ex safetyenvironmental regulations 0 Losers of protectionism consumers winners of protectionism domestic producers 0 Trends in trade o In 1850s Britain and others pushed for more countries to liberalize their trade policies 0 1914 start of WW1 international trade relations entered a 30 year crisis until after WW2 o Post 45 trade liberalization restarted as America emerged as the leader in global economic and political affairs Why Do Governments Restrict Trade 0 Trade barriers reflect domestic concerns 0 Trade barriers benefit domestic producers by raising the price of imported goods 0 3 Costs of Protectionism 0 Higher prices paid by consumers o Redistribution of income I Redistributive effect income is redistributed from domestic consumers to the protected domestic industry 0 Loss of efficiency in resource usage created dead weight loss Winners and Losers in International Trade 0 3 losers of protectionism 0 Consumers gt have to pay more for the product quotlosequot money 0 Domestic exporters gt other countries retaliate against our protectionism and levy tariffs on our exporters effect exporters product is more expensive and less attractive to foreigners to buy less profit 0 Politicians gt upset consumers and exporters bad for elections Economic Interests and Trade Policy 0 2 leading theories regarding tradepolicy interests StolperSamuelson RicardoViner o StolperSamuelson Theorem 0 Builds off of the HeckscherOhlin model 0 Used to predict which industries to protect or liberalize o Theorizes that protectionism benefits the scarce factors of production and hurts the abundant factors of production I Benefits the scarce factors protectionism keeps foreign goods out of market I Hurts abundance factors products compete with cheaper foreign sources 0 Theorizes that trade benefits the owners of the factors of production that are used to produce the goods exported the most I HO model suggests that this factor would be the most abundant factor 0 RicardoViner Theorem 0 Asks why whole industries often act together I Some factors of production are specific to their industry I These factors aren t easily mobile hard to convert them to other uses 0 Ex hard to convert a steel making machine to an agriculture tool 0 Because these factors are industry specific there is a high incentive to keep those industries productive and safeguarded from completion since the workersmachinery have no alternative work option 0 Workers interests flows from hisher sector of economic activity to the whole economy Domestic Institutions and Trade Policy 0 Small groups are better able to overcome collective action problems 0 Those domestic institutions that reward narrow interests will be more protectionist o Centralized labor movement I Abundant labor free trade policy I Scarce labor protectionist policy 0 Local vs national interests I Local interest protectionist policy I National interest free trade policy 0 Partisanship I Political parties can be split over protectionismfree trade ideology Costs Benefits and Compensation 0 Trade liberalization is good for the overall economy but it hurts certain groups win the econ 0 Trade makes wages and profits similar across countries 0 quotfactor price equalization prices of the factors of production tend to equalize o trade liberalization leads to a decrease in the wages of domestic workers and an increase in the wages of foreign workers 0 workers whose wages decrease become mad so the govt has to compensate them 0 compensation actions for those hurt by trade liberalization welfare retraining Strategic Interaction in International Trade 0 governments consider other states likely tradepolicy responses when making their own trade policies 0 international trade bargaining problems resemble the Prisoner s Dilemma 0 both sides would be better off reducing their trade barriers 0 But concerns about cheating cause both actors to act noncooperatively 0 Trade disputes can impede cooperation o quotdumpingquot goods on the market selling goods below their true cost of production in order to drive out competition from the market I Dump consumers buy cheaper foreign good hurts domestic producers market becomes dominated by foreign producers I quotdumpingquot is the result of incomplete info 1 of 3 hindrances of cooperation Overcoming Strategic Interaction Problems 0 Factors facilitating cooperation and coordination 0 Small number of traders makes it easy for governments to monitor each other s behavior OOOOO Hegemonic stability can ensure cooperation when large number of traders are present Informed trade negotiations Iteration repeated interaction provides incentives to avoid cheating Linking policy issues to trade cooperation International institutions I Ex GA39I39I39 which became the WTO I quotMost Favored Nation MFN status 0 Level of treatment given to one country by another country that gives it trade privilagesrights equal to other states wMNF status 0 Ex The US grants Mexico wMFN status and agrees to reduce tariffs by 20 If the US grants Canada a MFN status then it has to reduce its tariffs wCanada by 20


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