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75 Cards in this Set
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david |
ricardo 1817 |
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intra industry trade |
refers to the exchange of similar products belonging to the same industry. The term is usually applied to international trade, where the same types of goods or services are both imported and exported. |
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opp cost |
The cost of an alternative that must be forgone in order to pursue a certain actio |
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comparative advantage |
the ability to export a product more efficiently than another. |
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Ricardin Model assumptions |
2 countries, 2 commodities free trade perfect factor mobility within the country no transporation costs labour theory of value (unique EP and homogenous) |
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Heckscher-Ohlin Theorem Assumptions |
-2 nations, 2 commodities, 2 factors -same technology -one commodity is labour intensive and the other is capital intensive in both countries -indentical tastes -perfect factor mobility within countries but not internationally -no transport costs, tariffs or other obstacles to free trade -all resources fully employed |
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IT |
international trade- political competietion between countries |
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IP |
policies to regulate flows and their effect on welfare |
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Heckscher-Ohlin Theorem |
countries export commodities which use their abundant (cheap) factors and import the commodities that use their scarce (expensive) factor intensively factor abundance is the main cause of CA & IT a.k.a. factor proportions/factor endowment thoerem |
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Heckscher-Ohlin Implications |
1 factor-price equalisation 2 stolper-samuleson theorem 3 rybczynski theorem |
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Factor Mobility |
the ability to move factors of production—labor, capital, or land—out of one production process and into another.
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Heckscher-Ohlin Implication 1 |
Factor Price equalisation suggests that IT will bring about equalisation in the relative and absolute returns to homogenus factors across nations. I.e, It is a subsititue for factor mobility (𝑤𝑎𝑔𝑒𝑠 𝑖𝑛 𝑈𝐾)/(𝑟𝑒𝑛𝑡 𝑖𝑛 𝑈𝐾) = (𝑤𝑎𝑔𝑒𝑠 𝑖𝑛 𝐶ℎ𝑖𝑛𝑎)/(𝑟𝑒𝑛𝑡 𝑖𝑛 𝐶ℎ𝑖𝑛𝑎) |
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realtive price |
Price of a commodity as it compares to another. The relative price is usually presented as a ratio between the two prices. |
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Heckscher-Ohlin Implication 1, so.. |
each country faces the same commodity prices, because of free trade in commodities, uses the same technology for production, and produces both goods. Crucially these assumptions result in factor prices being equalized across countries without the need for factor mobility, such as migration of labor or capital flows. |
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Heckscher-Ohlin Implication 1Criticsms |
- countries may produce differnet goods -different technologies could affect the productivites of factors and therefore the wages/rates paid to these factors(factor reversal) -trade barriers and transporation costs may prevent goods prices and factors from equalising -an economy liberalizes trade, factors of produciton may not quickly move to the industries that intesively use abundant factors. In the short run, the productivity of factors will be determined by their use in their current industry, so that their wage/rate may vary across countries. |
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Heckscher-Ohlin Implication 2 |
Stolpher - Samuleson Therom income distribution Factors that are used intensively in producing the export good gains and the factors used inteively in producing the import good loses. a rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor. |
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Heckscher-Ohlin Implication 3 |
Rybczynski Theorem If output prices are held constant as the supply of a factor of production increases, then the supply of the good that uses this factor intensively increases and the supply of the other good decreases. at constant relative goods prices, a rise in the endowment of one factor will lead to a more than proportional expansion of the output in the sector which uses that factor intensively, and an absolute decline of the output of the other good. |
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Heckscher-Ohlin Leontief's paradox |
the country with the world's highest capital-per worker has a lower capital/labour ratio in exports than in imports. US is better at exporting less capital intesinve products |
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Capital to Labour Ratio |
High Capital to Labour Ratio: labour costs are high, firms will look to substitute capital for labour. |
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Empirical Evidence of the Heckscher-Ohlin Model |
Leontief's paradox at an internantional level manufacturing data between low income and high income data supports theory. |
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Heckscher-Ohlin Model Intra industry trade measurement + reasons |
IIT index = 1 - (𝑿−𝑴) / (𝑿+𝑴) - EoS, Product Cycle, Overlapping demands |
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Gains from intra-industry trade |
reflect economies of scale (lower costs) and wider consumer choices not a comparative advanatge |
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Gains from inter-industry trade |
relfect comparative advanatge (Home, capital abdunant country is a net exporter of capital intensive good) |
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comparative advanatge in producing the differentiated good |
will likely cause a country to export more of that good than it imports. |
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intra industry and inter industry |
inter- between industries intra- within industry |
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relative importance of intra industry trade |
-depends on how similar countries are. --countries with similar relative amounts of FoP countries with different relative amounts of FoP are predicted to have inter-industry trade -Unlike inter-industry trade in the Heckscher-Ohlin model, income distribution effects are not predicted to occur with intra-industry trade |
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ricardin model why, what, who |
why- increase output and income what- trade pattern determined by CA Who- countries with ca gain from it and the ones with CD lose |
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Heckscher-Ohlin Model Why, What, Who |
why- to increase output and income what- trade pattern is determined by factor endowment and EoS who- trade beneifts the industries that use intensively the abdundant factor, whule those tha tuse intensively the scare factor lose from trade |
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inter-industry trade model |
- 2 countries (A- L abundant and B- K abundant) - 2 Factors (L and K) - 2 goods (X- L intensive and Y-K intensive) - When the products are homogeneous the H-O theory of CA assumes that A produces X and B produces Y |
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intra industry trade model |
when products are differenetiated - 2 countries (A- L abundant and B- K abundant) - 2 Factors (L and K) - 2 goods (X- L intensive and Y- K intensive) - A is a net exporter of x but also imports some X and exports some Y - B net exporter of Y but also imports some y and exports some x |
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inter/intra type of trade |
homeogenous goods: mostly inter-industry trade differentiated goods: some inter some intra industry trade Exceptions:Cross border trade (lower costs) Entrepot tradeRe-exports Seasonal goods, tourist activities |
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Trade Policy Instruments |
- Tariffs - Quotas - Subsidies - Other non tariff barriers (protection) |
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consumer surplus (free trade) |
difference between the total amount that conumsers are willing and able to pay for a good or serivce (indicated by demand curve) and the total amount that they actually do pay (the market price) |
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producer surplus (free trade) |
the difference between the amount that a producer of a good recieves and the minimum amount that they are willing to accept for the good. |
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Equilibrium in autarchy (free trade - no trade) |
the configuration of prices and quantities at which queantities supplied and demanded within the economy are equal, so tha tno trade would take place even if it were permitted. |
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free trade equilibirum |
Free-trade equilibrium (E): pW=p1 Qw=D1-S1=S’1-D’1 |
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Tariff (Trade Instru) |
tax levied on imported or exported goods specific: fixed charge for each unit of imported goods (£1 per kf of cheese) ad valorem: fraction of the value of imported good (25% tariff on value of imported cars) |
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costs and benefits of tariffs (Trade Instru) |
a tariff raises the price of a good in the importing country, making its consumer surplus decrease (making ocnsumers worse off) and making its producer surplus increase (making producers better of) |
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net welfare effects (Trade Instru) |
go to slide 13 L3 |
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export subsidies (Trade Instru) |
specific subsidy: payment per unit exported ad volerm: payment as a proportion of hte value exported -export subsisdy raises the price of a good in the exporting country, making its consumer surplus decrease (making its consumers worse off) and making producer surplus increase (making producers better off) -government revenue also decreases -raises price of a good in exporting country while lowering price in foreign country export subsisy worsens the terms of trade by lowering price of domestic products in world markets (contrast to tariff) |
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effects of export subsisdy (Trade Instru) |
see slide 16 |
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import quota (Trade Instru) |
-restriction on the quantity of a good that may be imported -restriction is usually enforced by issuing licenses to domestic firms that import, or in some cases to foreign governments of exporting countries -a binding import quota will push up the price of the import because the quantity demanded will exceed the quantity supplied by domestic producers and from imports -when quota is used intead of tariff the gov receives no revenue. the revenue from selling imports at high prices goes to quota license holders: either domestic firms or foreign govts -extra revenues are called quota rents |
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society centered approach to trade politics |
trade has distibutional consquences that generate political competition (free trade v protection) 1. factor incomes and class conflict: stolper samuelson theorem) and the emergence of intrest groupds: L v K owners 2. sector incomes and industry conflict (factor mobility vs specfic factors) export oriented vs import competeting sectors |
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WTO: negotitations |
1reduction on tariff rates - through multilateral negotiations 2 binding - a tariff is 'bound' by having the imposing country agree not to raise it in the future 3 prevention of non tariff- barriers - quotas and export subsidies are changed to tariffs because the costs of tariff protection is more apparent |
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WTO principles |
1 market liberalism 2 non- discrimination principles (MFN clause, National treatment) 3 transparency of national trade policies 4 dispute settlement mechanism: consultation and Review (1. implementation, Compensation, Retaliation) |
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trade creation |
home production replaced by lower-cost imports from another member.
-For members there is increased specialisation (CA) - increased welfare (production and consumption) -worsened collective terms of trade -third parties have increased exports due to higher income in cu -world: more efficient resource allocation |
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labor theory of value |
the economic value of a good or service is determined by the total amount of socially necessary labor required to produce it. |
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factor endowment |
Amount of labor, land, money and entrepreneurship that could be exploited for manufacturing within a country. |
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realtive price |
Price of a commodity as it compares to another. The relative price is usually presented as a ratio between the two prices. |
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WTO Doha round |
-latests round of trade negotions -aiming to achieve major reform on the international trading system through the introduction of lowered trade barriers and revived rules - fundamental objective is to improve trading prospects of developing countries -mandate involved agriulcutulre, IPR and services. -most of the remaininf forms of protection are in agri, textiles and clothing industryings that are politcaly active |
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'Singapore Issues' |
three issues: trade and investment, competition policy, transparency in government procurement & trade facilitation |
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WTO new challenges |
-new role of feveloping countries -->from 24 to 253; G20 -->shift from cpaital intensive liberalisation to senstive sectors - NGOs -->concerned about consumers: health/safety, environemental regulations -->decision making bias towards producers -WTO reform: balance between producers and consumers interest |
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Regional Trade Agreement |
-agreement between two or more countries to liberalise trade between each other, but not with the rest of the world -WTO memebers are not allowed to participate in that discrimination -->exception if lowest tariff rate is zero |
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Types of Regional Trade Agreements |
- preferential trade agreements - free trade areas - customs union (CU) - common market - ecnomic union |
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trade diversion |
lower cost imports from RoW replaced by higher imports from CU member -for memebers this means increased welfare -for third parties production shifts aware from comparative advantage -for the world this leads to inefficient resource allocation |
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spatial model |
demonstrates consumer preference for particular brands of goods and their locations |
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dominant strategy: protect/protect |
-pareto suboptimal outcome: both actors better off at liberalise/liberalise -nash equilibirum: neither player has an incentive to change strategy unilaterally (reduce tariffs) - governments could agree to liberalise but there is the problem of enforcement mechanism (no body can cheat) |
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cooperation conditions under prisoners dilemma |
1. Iteration: one time choice, one time payoff 2. reciprocity: each actor plays the strategy played by other actor in previous round of game 3. trade off between future payoffs and short term gains from cheating |
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WTO provides 2 conditions for coorporation via |
(iteration and reciprocity) 1 infrastructure for cooperation and rules and monitoring system 2 dispute settlement mechanism (enforcement of trade agreements) |
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Prisoner Game theory |
the police have arrested two suspects and are interrogating them in separate rooms. Each can either confess, thereby implicating the other, or keep silent. No matter what the other suspect does, each can improve his own position by confessing. If the other confesses, then one had better do the same to avoid the especially harsh sentence that awaits a recalcitrant holdout. If the other keeps silent, then one can obtain the favorable treatment accorded a state’s witness by confessing. Thus, confession is the dominant strategy for each. But when both confess, the outcome is worse for both than when both keep silent. |
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Exchange rate definitions |
direct - price of foriegn currency in terms of the domestic currency (£.69 / $ 1) (pound is domestic) indirect - price of domestic currency in terms of the foreign currency ($1.45 / £1) (pound is domestic) |
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ER comparisson |
-price of goods expressed in different currencies -return on investments paid in different currencies |
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exchange rate changes |
- appreciation: increase in price of the domestic currency in terms of the foreign currency ($1.45/£1-->$1.50/£1) (pound is domestic currency) -depreciation: decrease in the price of domestic currency in terms of the foreign currency price ($1.40/£1 --> $1.40/£1) |
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effects of exchnage rate changes |
appreciatation makes exports more expensive and imports cheaper depreciation makes exports cheaper and imports more expensive |
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ER and Current Account |
CA = EX - IM Appreciation: exports price increase; exports demand decrease Imports price decrease; imports demand increase (CA Worsens) Depreciation exports price decrease; exports demand increase imports price increase; imports demand decrease (CA improves) |
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Exchange Rate Systems |
Flexible/clean float Managed Float Crawling Peg Fixed but Adjustable Currency Board |
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Flexible Exchange Rate |
currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. Thus, floating exchange rates change freely and are determined by trading in the forex market. |
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Fixed Exchange Rate |
the government or central bank ties the official exchange rate to another country's currency (or the price of gold). The purpose of a fixed exchange rate system is to maintain a country's currency value within a very narrow band. |
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floating exchange rate |
a system in which governments need to reach a prior agreement among them before they may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed.
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central bank monetary tools powerless to affect |
Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output. |
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managed float/dirty flaot |
the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries' exchange rates by buying and selling currencies. It is also known as a dirty float. |
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Balance-of-payments adjustments |
in a fixed exchange system, intervention changes the money supply. |
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ER and Asset Returns |
foriegn interest rates + expected rate of depreciation of domestic currency = expected rate of return on foreign currency measured in domestic currency |
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The effect of changing interest rates on the current exchange rate |
All else equal, an increase in the interest paid on deposits of a currency causes that currency to appreciate against the foreign currency. |
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The effect of changing expectations on the current exchange rate |
All else equal, an increase in the expected future exchange rate of a currency causes that currency to appreciate against the foreign currency in the present |
