International Trade - Theory and Policy, 2010a

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Similarly, by rearranging the above inequality, (PWPC)Aut>(P∗WP∗C)Aut, which means that the autarky price of wine is higher in the United States (in terms of cheese) than it is in France. In other words, a gallon of wine can be exchanged for more cheese in the United States than it will yield in the French market. Next, suppose the barriers to trade that induced autarky are suddenly lifted and the United States and France are allowed to trade freely. For simplicity, we assume there are no transportation costs to move the products across borders. Differences in price ratios between countries and the desire to make more profit are sufficient to generate international trade. To explain why, it is useful to incorporate some friction in the trading process and to tell a dynamic story about how a new free trade equilibrium is reached. First, note that the higher price of cheese in France means that cheese workers in the United States could get more wine for their cheese in France than in the United States. Suppose one by one over time cheese workers begin to take advantage of the opportunity for trade and begin to sell their cheese in the French market. We assume that some workers are more internationally adroit and thus move first. The motivation here is profit. Workers want to get more for the goods they are selling. As the U.S. cheese workers appear in the French market, the supply of cheese increases. This also represents exports of cheese from the United States to France. The increased supply will reduce the price of cheese in the French market, meaning that over time, the quantity of wine obtained for a pound of cheese will fall. Thus PC∗/PW∗ falls once trade is opened. Next, consider French wine workers immediately after trade opens. Since the price of wine is higher in the United States, French wine workers will one by one over time begin to sell their wine in the U.S. market. This represents exports of wine from France to the United States. The increased supply of wine to the United States lowers its price on the U.S. market. Thus each gallon of wine will trade for less and less cheese. This means PW/PC falls, which also means that its reciprocal, PC/PW, rises. Saylor URL: http://www.saylor.org/books Saylor.org 107
These shifts in supply will continue as long as the prices for the goods continue to differ between the two markets. Once the prices are equalized, there will be no incentive to trade any additional amount. Equalized prices mean that a pound of cheese will trade for the same number of gallons of wine in both markets. The free trade prices will be those prices that equalize total supply of each good in the world with total demand for each good. As a result of trade, the price ratio, or terms of trade, will lie in between the two countries’ autarky price ratios. In other words, the following inequality will result: (PCPW)Aut aLCaLW. Note that this inequality will be true as soon as the price deviates from the autarky price and long before the free trade prices are reached. This also means that shortly after trade begins, the price of cheese (measured in terms of wine) exceeds the cost of producing cheese (also measured in terms of wine). Normally, when we measure the price and cost in dollar terms, when the price per unit exceeds the cost per unit, then positive profit is realized. The same is true when we measure the price and cost in terms of wine. Thus as soon as trade begins to change prices, cheese production becomes more profitable in the United States. And because we assume people are profit seeking, they will therefore seek to expand cheese Saylor URL: http://www.saylor.org/books Saylor.org 108
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This text was adapted by The Saylor
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Chapter 1 Introductory Trade Issues
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However, rapid growth in the value
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As of 2009, 153 countries were memb
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International trade is a field in e
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imported, the U.S. government colle
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Kenya 12.7 Ghana 13.1 Generally spe
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Average tariffs can be measured as
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When the bubble bursts, the demand
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missed deadlines are commonplace in
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a well-known “bicycle theory” a
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But at the same time that many deve
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Recent opposition to trade liberali
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ought back to the United States and
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conference attended by the main all
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One of the key principles of the GA
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arriers. [1] The trade remedy laws
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ound tariff rate the country reache
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instead, they are put into place ov
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5. The WTO principle to treat an im
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subsidies. Recall that export subsi
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As a result of Uruguay Round negoti
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Agreement, or TRIPS. The TRIPS inte
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1.7 The World Trade Organization LE
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1. Consultations. The DSB first dem
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countries from choosing more destru
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P, P+ CAFTA-DR FTA PE MA OM R SG U.
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0806.10.20 $1.13/m 3 (Feb. 15-Mar.
Page 58 and 59: Tariffs vary according to time of e
Page 60 and 61: 1.9 Appendix B: Bound versus Applie
Page 62 and 63: EXERCISE 1. Jeopardy Questions. As
Page 64 and 65: 2.1 The Reasons for Trade LEARNING
Page 66 and 67: For example, the Ricardian model of
Page 68 and 69: 2. Learn the major historical figur
Page 70 and 71: could end up with more of both good
Page 72 and 73: The primary issue in the analysis o
Page 74 and 75: Real wages (and incomes) of individ
Page 76 and 77: he begins planting seeds in the sec
Page 78 and 79: In this way, we might raise the wel
Page 80 and 81: 2.3 Ricardian Model Assumptions LEA
Page 82 and 83: Utility Maximization and Demand In
Page 84 and 85: United States L C + L W = L France
Page 86 and 87: 2. Suppose that the unit labor requ
Page 88 and 89: KEY TAKEAWAYS The equation aLC QC
Page 90 and 91: comparative advantage in newspaper
Page 92 and 93: −aLCaLW⎡⎣⎢hrslbhrsgal=gallb
Page 94 and 95: KEY TAKEAWAYS Labor productivity i
Page 96 and 97: 2.6 A Ricardian Numerical Example L
Page 98 and 99: With full employment of labor, prod
Page 100 and 101: At this point, we can already see a
Page 102 and 103: The answer to some of these questio
Page 104 and 105: wC=PCaLC. If production occurs in t
Page 106 and 107: Thus a good way to think about how
Page 110 and 111: production. But where will they fin
Page 112 and 113: The focus on real wages allows us t
Page 114 and 115: Real Wages in Autarky To calculate
Page 116 and 117: exchange. Thus the real wage of che
Page 118 and 119: 2.11 The Welfare Effects of Free Tr
Page 120 and 121: Free trade will raise aggregate wel
Page 122 and 123: Chapter 3 The Pure Exchange Model o
Page 124 and 125: A Simple Example of Trade Suppose t
Page 126 and 127: 3.2 Determinants of the Terms of Tr
Page 128 and 129: Persuasion The art of persuasion ca
Page 130 and 131: KEY TAKEAWAY The terms of trade is
Page 132 and 133: two individuals make a voluntary ex
Page 134 and 135: 3.4 Three Traders and Redistributio
Page 136 and 137: is not motivated by profit but inst
Page 138 and 139: The changes described above assume
Page 140 and 141: 3.6 The Nondiscrimination Argument
Page 142 and 143: clothing worker. The same applies i
Page 144 and 145: the page, scroll down to the “Bou
Page 146 and 147: 4.1 Factor Mobility Overview LEARNI
Page 148 and 149: argument that free trade can only b
Page 150 and 151: them, but only if the prices are ve
Page 152 and 153: 4.3 Time and Factor Mobility LEARNI
Page 154 and 155: EXERCISE 1. Jeopardy Questions. As
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KEY TAKEAWAY The immobile factor m
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wine workers and cheese workers. Th
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In autarky, the quantity demanded o
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4.7 Depicting a Free Trade Equilibr
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0 the variable does not change A th
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Thus cheese workers are most likely
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Real Wage of Wheat Workers in Terms
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wages. However, these extra profits
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EXERCISE 1. Jeopardy Questions. As
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French production and consumption i
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5.1 Chapter Overview LEARNING OBJEC
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less-developed countries have much
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would rise, while the wage rate wou
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Ricardian model, then factor prices
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4. This is by which industries diff
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where KC and KS are the quantities
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Let aLC[labor−hrsrack] represent
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The capital-labor ratio in an indus
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that would employ all the capital i
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The Relationship between Endowments
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Suppose the exogenous variables of
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Adding these two equations vertical
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3. Write the magnification effect f
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tariffs or other government regulat
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If the price of clothing had risen,
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Table 5.6 Numerical Values for Exog
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w∧>PC∧>PS∧>r∧. The effect i
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2. Suppose the price of cheese fall
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this requires a fair amount of adva
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workers per unit of capital in the
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of quantities CS″/CC″. Since CS
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In Figure 5.8 "Free Trade Equilibri
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5.11 National Welfare Effects of Fr
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calculating changes in real income
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who has deposits in a pension plan
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export industry in order to benefit
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Income is redistributed among indiv
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Thus it is always possible to find
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affects the capital-labor ratios in
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1. Describe the pattern of factor f
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assumed to be freely and costlessly
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expansion of output in the export s
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[1] See R. W. Jones, “A Three-Fac
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product line for a representative t
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The total amount of revenue earned
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The horizontal length of Figure 5.1
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Our prime concern, however, is the
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An alternative version of the magni
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8. The magnification effect for pri
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can be used to transport tomatoes o
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esponds to the excess supply of wor
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The effect on workers is, in genera
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Factor Rewards over Time Now let’
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Figure 5.20 Dynamic Import-Capital
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In summary, the models suggest that
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[1] See J. P. Neary, “Short-Run C
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6.2 Economies of Scale and Returns
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produced and if the costs of this e
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6.3 Gains from Trade with Economies
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United States aLC = 1 L = 100 Franc
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thirty racks of clothing, then each
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model best describes markets in whi
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2. Each firm produces a product tha
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2. The demand assumption in which e
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Keep in mind that this is the equil
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KEY TAKEAWAYS A market equilibrium
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1. If the product is such that an i
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varieties may increase aggregate we
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7.1 Basic Assumptions of the Partia
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2. The term used to describe a coun
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where XSUS(.) is the export supply
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This implies also that world supply
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1. The price that equalizes one cou
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The price that ultimately prevails
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Surplus", some firm would be willin
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Changes in Producer Surplus Suppose
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2. The term used to describe a meas
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the same price for their product re
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to purchase the Mexican wheat at $1
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The effect on the foreign price is
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The quantity of imports and exports
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the sum of the gains exceeds the su
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indicate the effect of each policy
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7.6 The Optimal Tariff LEARNING OBJ
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zero. Somewhere between a zero tari
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3. The tariff rate that corresponds
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KEY TAKEAWAYS An import tariff wil
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7.8 Import Tariffs: Small Country W
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3. The tariff causes a redistributi
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1. Where on the graph is the level
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We examine the effects of optimal t
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3. Given player one’s optimal pol
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The goal of a cooperative equilibri
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1. Use the information provided in
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7.10 Import Quotas: Large Country P
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An import quota will reduce the qua
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KEY TAKEAWAYS To administer a quot
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demand is equal to the quota level.
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market decreases producer surplus i
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Foreign National Welfare 2. Suppose
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This implies that, in the case of a
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Quota Rents National Welfare + C
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Import Quota (Administered by Givin
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to as tariffication. In this way, f
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Next, consider the effects in this
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In situations where market changes
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where S is the specific export subs
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7.17 Export Subsidies: Large Countr
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the subsidy payments are made, then
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An export subsidy of any size will
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2. Identify the effects of a counte
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Table 7.12 "Welfare Effects of the
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Consumer Surplus − (G + H + I + J
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KEY TAKEAWAYS An antisubsidy law,
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9. What is the change in government
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Notice that a unique set of prices
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in the import country and in the ca
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Figure 7.36 Welfare Effects of a VE
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the quota rents will benefit, but p
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A the variable change is ambiguous
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Mexico, and all wheat sold in Mexic
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7.23 Export Taxes: Large Country We
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Because there are both positive and
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− the variable decreases 0 the va
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If a domestic consumption tax is im
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Equivalency between Domestic and Tr
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An import tariff applied on an impo
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KEY TAKEAWAYS Domestic production
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a Domestic Production Subsidy", whi
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Domestic policies can affect trade
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+ the variable increases − the va
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Domestic consumption taxes are ofte
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Figure 8.3 Inducing Exports with a
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8.7 Consumption Tax Effects in a Sm
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Since the cost to consumers exceeds
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When a specific consumption tax “
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time of the founding of the nation,
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Chapter 9 Trade Policies with Marke
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Market imperfections or market dist
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EXERCISE 1. Jeopardy Questions. As
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firm’s welfare) by restricting su
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are neatly kept and homes are well
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Policy-Imposed Distortions Another
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In this section, we will provide an
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Welfare-Improving Policies in a Sec
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Summary of the Theory of the Second
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9.4 Unemployment and Trade Policy L
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Suppose that international market c
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9.2 "Welfare Effects of an Import T
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Begin with the same surge of import
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eliminate the same unemployment imp
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A the variable change is ambiguous
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their own production efficiency imp
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Suppose that the infant industry ar
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This means that in the second perio
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The Economic Argument against Infan
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world efficiency standards, protect
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9.6 The Case of a Foreign Monopoly
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Assuming the monopolist maximizes p
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Import tariff effects on the import
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This shows that although a tariff c
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2. Recognize that a trade policy ca
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consider a large importing country
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the subsidy is set too high, the lo
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9.8 Public Goods and National Secur
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nonexcludable because once it is th
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efficiency loss. Nevertheless, the
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5. The term describing a ìgoodî l
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the environment. On the other hand,
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Pollution Effect National Welfare
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Govt. Revenue Pollution Effect + e
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A Source of Controversy For many en
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This statement points out that many
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noneconomists, providing permits th
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[4] World Trade Organization, “Tr
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product categories. This type of tr
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The key question of interest concer
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Figure 9.10 "Harmful Trade Diversio
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Free trade area effects on Country
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We assume that A has a specific tar
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The simple way to do that is to ima
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Chapter 10 Political Economy and In
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do indeed seek to maximize national
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a representative democracy, governm
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3. This type of lobbying does not i
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much larger than the number of firm
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We can now ask whether a household
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Large groups are much less effectiv
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Because the per-producer benefit of
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clearly he or she would vote for th
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10.7 The Lobbying Problem in a Demo
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Chapter 11 Evaluating the Controver
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the results from any one model. Ins
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increase in national welfare. This
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4. The enhancement of this is what
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of the real world. The real world c
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Another way to deflect the concern
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For example, an optimal tariff or o
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Stuart Mill in hisPrinciples of Pol
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11.5 The Economic Case against Sele
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to eliminate some of the inefficien
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effects, it would then need to meas
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to avoid the use of any such policy
Page 568 and 569:
Selected protection requires detail
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11.6 Free Trade as the “Pragmatic
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