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ECON 2181, Prof. Butt, Week 1 Notes

by: skenan

ECON 2181, Prof. Butt, Week 1 Notes ECON 2181

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Econ 2181 International Trade Theory Week 1 Notes
International Trade Theory and Policy
Ahsan Butt
Class Notes
gwu, Econ, econ2181, International, trade, Theory, Economics




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This 3 page Class Notes was uploaded by skenan on Tuesday September 13, 2016. The Class Notes belongs to ECON 2181 at George Washington University taught by Ahsan Butt in Fall 2016. Since its upload, it has received 27 views. For similar materials see International Trade Theory and Policy in Economics at George Washington University.

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Date Created: 09/13/16
ECON 2181 INTERNATIONAL TRADE THEORY WEEK 1 KEY TERMS IMPORTANT PEOPLE IMPORTANT CONCEPT CHAPTER 1: TRADE IN THE GLOBAL ECONOMY International Trade: the movement of goods and services across boarders. • Global changes have a great impact on international trade. Ex; global warming causes ices to melt on the Northern Sea of the Arctic Ocean. Ships are able to sail though this path, with lower costs. Export: a product sold from one country to another. Import: a product bought by one country from another. Trade: the selling and buying of goods and services between countries. Trade Balance: the Δ of a country’s total value of exports and its total value of imports. It is determined by macroeconomics conditions in the country. Trade Surplus: when a country exports more than it imports. (China) Trade Deficit: when a country imports more than it imports. (USA) Bilateral Trade Balance: the Δ of exports and imports between two countries. Value-added: the Δ of price and cost of producing a good. IPhone example: IPhone 3Gs USA China Based on the trade statistics, China is in profit due to Price: $500 <------ $179 its large amount of exports. In reality, the US is the Cost: $179 $6.50 one profiting from this trade. International trade stats do not include numbers. Profit: $321 $172.50 *$6.50 is the value-added by Chinese labor. International trade has changed over time. Foods, feeds, and beverages, and industrial supplies were 90% of imports in 1925, but were only 40% in 2010. Europe and the Americas combined account for about ½ of world exports, and Asia accounts for another 1/3 of world exports (2010.) The type of goods being traded between countries has changed from the period before World War I, when standardized goods (raw materials and basic processed goods like steel) were predominant. Today, the majority of trade occurs in highly processed consumer and capital goods, which might cross borders several times during the manufacturing process. Import Tariffs: taxes on international trade. ▯ Trade between European countries is high b/c of low tariffs. ▯ A large amount of world trade occurs between countries that are similar in their levels of industrialization and great wealth. Trade within Europe and between Europe and the United States accounts for over 1/3 of world trade. ▯ The vast majority of that trade is within the North American Free Trade Area, consisting of Canada, the United States, and Mexico. For example; Exports from Asia totaled about $5.7 trillion in 2010, or about one-third (34%) of world trade (this total includes only trade in goods and omits trade in services, which is becoming increasingly important.) India, for example, performs a wide range of services such as accounting, customer support, computer programming, and research and development tasks for firms in the United States and Europe. Gross Domestic Product (GDP): the value of all final goods produced in a year. Trade can also be reported as the ratio of trade to a country’s GDP. Ex; For USA, the average value of imports and exports (for goods and services) expressed relative to GDP was 15% in 2010. Most other countries have a higher ratio of trade to GDP. This table shows the ratio of total trade to GDP for each country, where trade is calculated as (Imports + Exports)/2, including both merchandise goods and services. Countries with the highest ratios of trade to GDP tend to be small in economic size and are often important centers for shipping goods, like Hong Kong (China) and Malaysia. Countries with the lowest ratios of trade to GDP tend to be very large in economic size or are not very open to trade b/c of trade barriers or distance from other countries. Trade Barrier: all factors that influence the amount of goods and services shipped across international boarders. “First Golden Age” of Trade: ▯ 1890 – World War I (1914-1918) ▯ Dramatic improvements in transportation, such as the steamship and the railroad that allowed for a great increase in the amount of international trade. ▯ Smoot-Hawley Tariff Act: signed into law in 1930, raised tariffs to as high as 60% on many categories of imports. These tariffs were applied by the US to protect farmers and other industries, but they backfired by causing other countries, like Canada, to retaliate, by applying high tariffs of its own against the US. France used import quotas, a limitation on the quantity of an imported good allowed into a country, to restrict imports from the US. “Second Golden Age” of Trade: ▯ Post-WWI. ▯ World trade grew steadily after 1950 in dollar terms and as a ratio to GDP. o Shipping container was invented in 1956, which dramatically reduced shipping costs and fueled the world economy. Foreign Direct Investment (FDI): occurs when a firm in one country owns (in part or in whole) a company or property in another country. ▯ The majority of world flows of FDI occur between industrial countries. ▯ Foreign direct investment is largely unrestricted in the industrial countries but often faces some restrictions in developing countries. ▯ Horizontal FDI: when a firm from one industrial country owns a company in another industrial country. ▯ Vertical FDI: when a firm from one industrial country owns a plant in a developing country. Low wages are the principal reasons that firms shift production abroad to developing countries. o FDI in Europe and U.S.: nearly ½ of the world total. o FDI in the Americas: Brazil and Mexico are two of the largest recipients of FDI, after China. th o FDI in Asia: China is the largest recipient of FDI in Asia, and 4 in the world. Migration: ▯ Globalization means many things: the flow of goods and services across borders, the movement of people and firms, the spread of culture and ideas among countries, and the tight integration of financial markets around the world. ▯ Free trade doesn’t promote free migration; all countries have restrictions on immigration. The majority of world migration occurs in developing countries as a result of restrictions on immigration into wealthier, industrial countries. ▯ International trade in goods and services acts as a substitute for migration and allows workers to improve their standard of living through working in export industries, even when they cannot migrate to earn higher incomes.


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