International Economics

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globalization

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the increasing integration of economies around the world, especially through goods and services, FDI, financial flows, technology transfer, movement of ideas of people

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key advantages of globalization

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greater access to FDI, technology, new ideas/ knowledge; promotes specialization and market efficiency; higher standard of living, more consumer choices and lower prices

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anti-globalization movement

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concerns: environmental damage, loss of domestic labor productions, erosion of domestic sovereignty

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key disadvantages of globalization

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greater interdependence, structural change, increased economic volatility, environmental concerns, labor standard concerns, increased income inequality

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standard of living

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biggest source of potential gain: access to items not available domestically, lower cost, greater variety

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___ flows more freely across borders than ____

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capital, people

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financial capital moves to nations/ markets where

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IR are higher

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FDI in plants and firms flow towards

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higher expected profits

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the movement of capital leads to

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more efficient use

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international trade theory

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analyzes the basis of and gains from international trade; focuses of microeconomic aspects

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international trade policy

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examines the reasons for and the effects of restrictions on international trade; analyzes the implications of such restrictions

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balance of payments

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provides a statistical summary of the size of international trade and international ownership for a country

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foreign exchange markets

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institutional framework for the exchange of one national currency into another; deals with the macroeconomic implications of the international economy

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adjustments in the balance of payments

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focuses on the relationship between internal and external aspects of the economy; examines how disequilibria lead to macroeconomic adjustment under different international monetary systems

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name 5 current international economic problems

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(1) trade protectionism in industrial countries
(2) excessive fluctuations and large disequilibria in exchange rates
(3) job insecurity from restructuring and downsizing in the US
(4) restructuring problems of transition economies
(5) deep poverty in many developing countries

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further examine trade protectionism in industrial countries

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what are the reasons for this protection?
what are the implications for the industrial countries?
what are the implications for the rest of the world?
how do regional trade blocks complicate efforts to reduce protectionism?

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further explain excessive fluctuations and large disequilibria in exchange rates

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large exchange rate fluctuations may disrupt international trade and harm economic growth;
what is the source of these fluctuations?
how can the international financial system be reformed to eliminate these fluctuations?

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name the 4 major international institutions

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(1) World Trade Organization (WTO)
(2) World Bank
(3) International Monetary Fund (IMF)
(4) United Nations (UN)

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World Trade Organization (WTO)

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authority over international trade in goods and services;
deals with the rules of trade between nations, negotiates and implements new trade agreements, arbitrates over trade disputes among members, polices adherence to WTO agreements

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World Bank

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provides loans to developing countries; goal is to reduce poverty

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International Monetary Fund (IMF)

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ensures members follow set of agreed-upon rules of conduct in international finance; provides borrowing facilities for nations in temporary balance of payments difficulties; oversees global financial system; international lender of last resort

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United Nations (UN)

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stated aims are to facilitate cooperation in international law, international security, economic development, social progress, and human rights issues;
founded in 1945 to replace League of Nations, to stop international wars and to provide a platform for peacefully resolving international disagreements

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what is the basis of trade?

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absolute advantage and comparative advantage

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what are the gains from trade?

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the models of absolute and comparative advantage show that the gains from trade are increased consumption gained through specialization in production and trade

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what is wealth to the mercantilist?

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the stock of precious metals possessed by a country

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what is the mercantilist conclusion?

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the wealth of one country must come at the expense of another country

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Mercantilist Policy

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exports must exceed imports for a country to become wealth- strict government control over economic activity to ensure a positive trade balance

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how is wealth measured in modern times?

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based on a country's ability to produce the goods and services that improve quality of life

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absolute advantage

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Adam Smith;
exists between nations when they differ in their ability to produce goods

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policy recommendations from absolute advantage

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specialization and trade are advantageous to both countries;
the best policy is laissez-faire - minimum government interference with economic activity

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what is the fatal flaw of the theory of absolute advantage?

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what happens when one country is better at everything?
comparative advantage

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comparative advantage

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David Ricardo;
a nation should specialize in and export the commodity in which its absolute disadvantage is smaller (the commodity of its comparative advantage), and should import the other commodity

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name 4 implications of comparative advantage

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(1) laissez-faire still holds
(2) gains need not be equal
(3) hours of work traded need not be equal
(4) trade is based on the existence of relative- not absolute- production advantages

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for comparative advantage, does the source of the productive difference matter?

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no;
the original idea was based on the labour theory of value- that costs and prices are solely determined by the labour content of an item;
opportunity cost holds that the cost of the item is the amount of another item that must be given in order to produce one more unit of the first item

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what does a PPF curve do/ tell us?

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identifies the maximum combinations of two products that a nation can produce by fully utilizing all the factors of production with the best technology available

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graphically, how does trade benefit a country?

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through specialization and increased production and trade, each country consumes outside its PPF curve

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explain increasing opportunity costs

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increasing amounts of another item must be given up in order to release sufficient resources to produce one more unit of a given item;
this is because of non-homogenous factors of production and factors that are not used at constant fixed proportions in production

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marginal rate of transformation (MRT)

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opportunity cost

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implications of increasing opportunity costs for the production possibility frontier

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MRT increases as more units of good X are produced;
demonstrated by a curved PPF

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community indifference curve

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displays the combinations of two products that offer the community the same level of satisfaction

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characteristics of community indifference curve

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negative slope;
convex to the origin;
higher curves;
different curves do not cross

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marginal rate of substitution

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MRS;
the amount of one commodity that must be given up as one gains additional units of another commodity

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autarky

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absence of international trade

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autarky equilibrium

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occurs when maximum society satisfaction has been obtained from available production- occurs when one community indifference curve is tangent to the PPF curve

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equilibrium relative commodity price in isolation

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given by the slope of the tangent line;
this slope also gives the opportunity cost (MRT)

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trade in the standard model is driven by

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differences in the opportunity costs of production

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theory of reciprocal demand

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John Stuart Mill (1806-1873);
production costs determine the outer limit to the terms of trade;
actual terms of trade are determined by the relative strength of each country's demand for the other's product

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with trade, at the final production and consumption points

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(1) specialization and trade have altered relative prices compared to autarky;
(2)relative prices in both nations are now the same;
(3) neither country completely specializes

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terms of trade

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the ratio of the index price of a nation's exports to the index price of its imports

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an improvement in a country's terms of trade are typically viewed as

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beneficial- indicates that fewer export goods will need to be provided to purchase the same number of import goods

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terms of trade can be interpreted as

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a type of (barter) commodity exchange rate

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specialization and trade will result in a changing employment mix- job losses in some sectors and gains in others

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depends on a nation's comparative advantage;
the expected movement of employment is from manufacturing to the service sector;
but most recent trends suggest white-collar jobs are increasingly being outsourced to low-wage countries

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what are the effects of the recent trends in white-collar outsourcing?

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it challenges the Ricardian theory of comparative advantage because international movement of the factors of production was never taken into consideration;
potentially, no gains from trade, some win others lose

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the H-O theory is based on what assumptions?

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2 nations, 2 commodities, 2 factors of production;
both nations use the same technology;
commodity X is labour intensive and Y is labour intensive;
all resources are fully employed;
no obstruction to the free flow of international trade

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the H-O theory is based on which two subsidiary theorems?

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H-O theorem and factor price equalization theorem

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H-O theorem

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relative factor abundance drives comparative advantage and the pattern of trade;
a nation will export the commodity whose production requires the intensive use of the nation's relative abundant (cheap) factor and import the commodity that requires the scarce (expensive) factor

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factor price equalization theorem

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international trade will bring about equalization in the relative and absolute returns to homogeneous factors across nations;
wages and other factors returns will be the same after specialization and trade have occured

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the Stolper-Samuelson theorem demonstrates that

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an increase in the relative price of a commodity raises the return of the factor used intensively in its production (the abundant factor)

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based on factor price equalization, increased trade will

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reduce the real income of the nation's relatively scarce factor and increase the real income of the nation's relatively abundant factor

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implications of factor price equalization: developed nations (expected to be capital abundant)

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following the opening of trade, the return to capital in the developed countries is expected to increase and wages are expected to fall;
this pattern of change should worsen inequality in the developed countries

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implications of factor price equalization: developing countries

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the change in inequality should be the opposite of developed countries

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Leontief Paradox

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a 1951 test of the H-O theory that showed that the pattern of trade did not fit the conclusions of the H-O theorem

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why did the Leontief Paradox happen?

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the test assumed: a two factor world (labor and capital) and
consistent technology between nations and
perfect mobility between factors of production

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economy of scale model of trade

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characterized by increasing returns to scale;
production on a larger scale lowers per unit costs of production and provides a new source of cost advantage on which to base exports

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differentiated products

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similar products produced by different manufacturers in the same industry or general trade group

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intra-industry trade

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international trade in differentiated products;
allows producers to exploit product specific economies of scale;
allows consumers to benefit from product variety

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briefly describe the product cycle model of trade

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advanced industrialized countries develop and introduce new products,
production spreads to other nations,
as production becomes standardized, the original developer loses its technologically based comparative advantage and becomes an importer

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transportation costs

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include all the landed costs;
sometimes provides an advantage between geographically close countries

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environmental standards and trade

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strict standards raise the cost of production which presents a moral hazard to reduce these protections

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gravity model of trade

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bilateral trade flows based on the economic sizes of and distances between two countries;
countries with similar levels of income trade more;
brings into question the H-O model in the real world

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name the four types of tariffs

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(1) import/ export tariffs;
(2) ad valorem tariff;
(3) specific tariff;
(4) compound tariff

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ad valorem tariffs

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fixed percentage tax

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specific tariff

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fixed sum tax

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bound tariffs

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agreed upper limits for tariffs;
most countries keep some wiggle room between what they agree to on an international level and domestic practice;
once a rate has been bound, it can only be raised if all affected parties are suitably compensated

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applied tariffs

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those tariffs that are actually applied by the country concerned- usually not the same as the bound rate

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implications of interfering with trade differ depending on the nature of the country

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the key difference is whether the country is small or large

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a "small" country is one where

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changes in its domestic market do not alter the international price of the commodity-
this means the imposition of the tariff does not alter the international price

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a "large" country is one where

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changes in its domestic market do alter the international price of the commodity-
the imposition of the tariff does alter the international price

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optimum tariff

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the tariff rate that maximized the benefit resulting from the imposition of a tariff-
the gain comes from the improvement to terms of trade

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positive welfare gains from an optimum tariff exist only if

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no retaliation in other markets occurs- history does not support this assumption

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nominal tariff

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percentage increase in the price of the final commodity

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effective rate of protection

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offers a better measure of the protection offered producers as it takes into account the cost to producers of tariffs on input markets;
calculated on the increase in domestic value added as a result of tariff protection

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name five non-tariff trade barriers (NTBs)

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(1) quotas
(2) voluntary export restraints (VERs)
(3) technical, administrative, and other regulations
(4) international cartels
(5) dumping

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quotas are ____ transparent than tariffs

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less- this increases opportunity for hidden protectionism

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why are quotas used in developed countries?

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to protect domestic industry or agriculture and for balance of payment reasons

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why are quotas used in developing countries?

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to stimulate the import substitution of manufactured products or for balance of payments reasons

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what are quasi-quotas?

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import licensing requirements;
minimum import price limits

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what are five initial effects of a quota as compared with an equivalent tariff?

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the equilibrium price will be the same;
level of production will be the same;
level of domestic consumption will be the same;
revenue to government the same;
same regions of deadweight loss

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how are the effects of a quota different than the effects of a tariff?

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changes in domestic supply or demand alter imports with a tariff;
quantity of imports with a quota does not change with market changes

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quotas and imperfect competition

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because quotas are a numerical limit, they limit the competition faced by domestic producers;
this better allows domestic producers to exploit their monopoly power

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with a given import quota, an increased in demand will result in what three things?

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(1) higher domestic price
(2) greater domestic production
(3) lower domestic consumption

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with a given import tariff, increased demand will result in what three things?

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(1) leave the domestic price and domestic production unchanged
(2) consumption will be higher
(3) imports will be higher

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what is a voluntary export restraint (VER)?

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when the exporting nation voluntarily restricts its exports to a numerical limit

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explain technical, administrative, and other regulations

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serve as barriers to entry by raising the cost of imported goods or blocking the importation of certain products if they do not meet certain domestic standards

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what is dumping?

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when the sales price in the importing country is lower than the sales price in the exporting country or
the sales price in the importing country is below the costs of production

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name the three types of dumping

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persistent, sporadic, and predatory

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what is persistent dumping?

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continuous sale by domestic monopolists at a higher price in the domestic market than the international market

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what is sporadic dumping?

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occasional sale of a commodity below cost to unload an unforeseen/ temporary surplus of the commodity

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what is predatory dumping?

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temporary sale of a commodity at below cost to drive foreign producers out of business

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what are countervailing duties (CVDs)?

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if suspicion of dumping, US international trade law allows for the imposition of a CVD tariff in order to raise the domestic price to either foreign price or the average cost of production

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what are some common arguments for protectionism?

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increase domestic output and employment;
infant industry argument;
balance of payments;
domestic security reasons;
government revenue;
optimum tariff argument

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what are some arguments against protectionism?

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increased efficiency in resource allocation;
improved net economic welfare;
greater competition in domestic market;
forces domestic producers to become more competitive;
inflation gain through lower prices of imported goods

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give some background information on GATT and the WTO

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GAAT- established in 1948;
focus on trade in goods;
8 rounds of trade negotiations under GATT, the last being the Uruguay round;
WTO established in 1995

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the Uruguay round removed tariffs on what kinds of goods?

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pharmaceuticals, constructions equipment, medical equipment, paper products, and steel

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the Uruguay round had what effect on safeguards?

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countries are barred from implementing health and safety standards that are not based on scientific research

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the Uruguay round had what effect on intellectual property?

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20 year protection of patents, trademarks, and copyrights

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what happened with the establishment of the WTO?

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took the place of GATT;
allows for more expeditious resolutions of trade disputes

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what is the Doha round? what is it's goal?

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2001 in Doha, Qatar;
further liberalization of production and trade;
further tightening of anti-dumping regulations, investment and competition policies

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name five issues confronting the Doha round

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(1) existing on-going trade disputes
(2) developed world agriculture policies make it difficult for developing world to enter market
(3) development of regional trade groups
(4) calls for uniform labor and environmental standards
(5) expansion of GATT into investment issues