International Trade - Theory and Policy, 2010a

More documents

Recommendations

Info

In this section, we will provide an overview of the main results and indicate some of the implications for trade policy analysis. We will then consider various applications of the theory to international trade policy issues. First of all, one must note that economic models consist of exercises in which a set of assumptions is used to deduce a series of logical conclusions. The solution of a model is referred to as an equilibrium. An equilibrium is typically described by explaining the conditions or relationships that must be satisfied in order for the equilibrium to be realized. These are called the equilibrium conditions. In economic models, these conditions arise from the maximizing behavior of producers and consumers. Thus the solution is also called an optimum. For example, a standard perfectly competitive model includes the following equilibrium conditions: (1) the output price is equal to the marginal cost for each firm in an industry, (2) the ratio of prices between any two goods is equal to each consumer’s marginal rate of substitution between the two goods, (3) the long-run profit of each firm is equal to zero, and (4) supply of all goods is equal to demand for all goods. In a general equilibrium model with many consumers, firms, industries, and markets, there will be numerous equilibrium conditions that must be satisfied simultaneously. Lipsey and Lancaster’s analysis asks the following simple question: What happens to the other optimal equilibrium conditions when one of the conditions cannot be satisfied for some reason? For example, what happens if one of the markets does not clear—that is, supply does not equal demand in that one market? Would it still be appropriate for the firms to set the price equal to the marginal cost? Should consumers continue to set each price ratio equal to their marginal rate of substitution? Or would it be better if firms and consumers deviated from these conditions? Lipsey and Lancaster show that, generally, when one optimal equilibrium condition is not satisfied, for whatever reason, all the other equilibrium conditions will change. Thus if one market does not clear, it would no longer be optimal for firms to set the price equal to the marginal cost or for consumers to set the price ratio equal to the marginal rate of substitution. First-Best versus Second-Best Equilibria Consider a small perfectly competitive open economy that has no market imperfections or distortions, no externalities in production or consumption, and no public goods. This is an economy in which all resources are privately owned, the participants maximize their own well-being, firms maximize profit, and Saylor URL: http://www.saylor.org/books Saylor.org 447
consumers maximize utility—always in the presence of perfect information. Markets always clear and there are no adjustment costs or unemployment of resources. The optimal government policy in this case is laissez-faire. With respect to trade policies, the optimal policy is free trade. Any type of tax or subsidy implemented by the government under these circumstances can only reduce economic efficiency and national welfare. Thus with a laissez-faire policy, the resulting equilibrium would be called first best. It is useful to think of this market condition as economic nirvanasince there is no conceivable way of increasing economic efficiency at a first-best equilibrium. Of course, the real world is unlikely to be so perfectly characterized. Instead, markets will likely have numerous distortions and imperfections. Some production and consumption activities have externality effects. Some goods have public good characteristics. Some markets have a small number of firms, each of which has some control over the price that prevails and makes positive economic profit. Governments invariably set taxes on consumption, profit, property and assets, and so on. Finally, information is rarely perfectly and costlessly available. Now imagine again a small, open, perfectly competitive economy with no market imperfections or distortions. Suppose we introduce one distortion or imperfection into such an economy. The resulting equilibrium will now be less efficient from a national perspective than when the distortion was not present. In other words, the introduction of one distortion would reduce the optimal level of national welfare. In terms of Lipsey and Lancaster’s analysis, the introduction of the distortion into the system would sever one or more of the equilibrium conditions that must be satisfied to obtain economic nirvana. For example, suppose the imperfection that is introduced is the presence of a monopolistic firm in an industry. In this case, the firm’s profit-maximizing equilibrium condition would be to set its price greater than the marginal cost rather than equal to the marginal cost as would be done by a profit-maximizing perfectly competitive firm. Since the economic optimum obtained in these circumstances would be less efficient than in economic nirvana, we would call this equilibrium a second-best equilibrium. Second-best equilibria arise whenever all the equilibrium conditions satisfying economic nirvana cannot occur simultaneously. In general, second-best equilibria arise whenever there are market imperfections or distortions present. Saylor URL: http://www.saylor.org/books Saylor.org 448
Page 2 and 3:
This text was adapted by The Saylor
Page 4 and 5:
Chapter 1 Introductory Trade Issues
Page 6 and 7:
However, rapid growth in the value
Page 8 and 9:
As of 2009, 153 countries were memb
Page 10 and 11:
International trade is a field in e
Page 12 and 13:
imported, the U.S. government colle
Page 14 and 15:
Kenya 12.7 Ghana 13.1 Generally spe
Page 16 and 17:
Average tariffs can be measured as
Page 18 and 19:
When the bubble bursts, the demand
Page 20 and 21:
missed deadlines are commonplace in
Page 22 and 23:
a well-known “bicycle theory” a
Page 24 and 25:
But at the same time that many deve
Page 26 and 27:
Recent opposition to trade liberali
Page 28 and 29:
ought back to the United States and
Page 30 and 31:
conference attended by the main all
Page 32 and 33:
One of the key principles of the GA
Page 34 and 35:
arriers. [1] The trade remedy laws
Page 36 and 37:
ound tariff rate the country reache
Page 38 and 39:
instead, they are put into place ov
Page 40 and 41:
5. The WTO principle to treat an im
Page 42 and 43:
subsidies. Recall that export subsi
Page 44 and 45:
As a result of Uruguay Round negoti
Page 46 and 47:
Agreement, or TRIPS. The TRIPS inte
Page 48 and 49:
1.7 The World Trade Organization LE
Page 50 and 51:
1. Consultations. The DSB first dem
Page 52 and 53:
countries from choosing more destru
Page 54 and 55:
P, P+ CAFTA-DR FTA PE MA OM R SG U.
Page 56 and 57:
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 108 and 109:
Similarly, by rearranging the above
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:
Page 156 and 157:
factor to be moved and become produ
Page 158 and 159:
KEY TAKEAWAY The immobile factor m
Page 160 and 161:
wine workers and cheese workers. Th
Page 162 and 163:
In autarky, the quantity demanded o
Page 164 and 165:
4.7 Depicting a Free Trade Equilibr
Page 166 and 167:
0 the variable does not change A th
Page 168 and 169:
Thus cheese workers are most likely
Page 170 and 171:
Real Wage of Wheat Workers in Terms
Page 172 and 173:
wages. However, these extra profits
Page 174 and 175:
Page 176 and 177:
French production and consumption i
Page 178 and 179:
5.1 Chapter Overview LEARNING OBJEC
Page 180 and 181:
less-developed countries have much
Page 182 and 183:
would rise, while the wage rate wou
Page 184 and 185:
Ricardian model, then factor prices
Page 186 and 187:
4. This is by which industries diff
Page 188 and 189:
where KC and KS are the quantities
Page 190 and 191:
Let aLC[labor−hrsrack] represent
Page 192 and 193:
The capital-labor ratio in an indus
Page 194 and 195:
that would employ all the capital i
Page 196 and 197:
The Relationship between Endowments
Page 198 and 199:
Suppose the exogenous variables of
Page 200 and 201:
Adding these two equations vertical
Page 202 and 203:
3. Write the magnification effect f
Page 204 and 205:
tariffs or other government regulat
Page 206 and 207:
If the price of clothing had risen,
Page 208 and 209:
Table 5.6 Numerical Values for Exog
Page 210 and 211:
w∧>PC∧>PS∧>r∧. The effect i
Page 212 and 213:
2. Suppose the price of cheese fall
Page 214 and 215:
this requires a fair amount of adva
Page 216 and 217:
workers per unit of capital in the
Page 218 and 219:
of quantities CS″/CC″. Since CS
Page 220 and 221:
In Figure 5.8 "Free Trade Equilibri
Page 222 and 223:
5.11 National Welfare Effects of Fr
Page 224 and 225:
calculating changes in real income
Page 226 and 227:
who has deposits in a pension plan
Page 228 and 229:
export industry in order to benefit
Page 230 and 231:
Income is redistributed among indiv
Page 232 and 233:
Thus it is always possible to find
Page 234 and 235:
affects the capital-labor ratios in
Page 236 and 237:
1. Describe the pattern of factor f
Page 238 and 239:
assumed to be freely and costlessly
Page 240 and 241:
expansion of output in the export s
Page 242 and 243:
[1] See R. W. Jones, “A Three-Fac
Page 244 and 245:
product line for a representative t
Page 246 and 247:
The total amount of revenue earned
Page 248 and 249:
The horizontal length of Figure 5.1
Page 250 and 251:
Our prime concern, however, is the
Page 252 and 253:
An alternative version of the magni
Page 254 and 255:
8. The magnification effect for pri
Page 256 and 257:
can be used to transport tomatoes o
Page 258 and 259:
esponds to the excess supply of wor
Page 260 and 261:
The effect on workers is, in genera
Page 262 and 263:
Factor Rewards over Time Now let’
Page 264 and 265:
Figure 5.20 Dynamic Import-Capital
Page 266 and 267:
In summary, the models suggest that
Page 268 and 269:
[1] See J. P. Neary, “Short-Run C
Page 270 and 271:
6.1 Chapter Overview LEARNING OBJEC
Page 272 and 273:
6.2 Economies of Scale and Returns
Page 274 and 275:
produced and if the costs of this e
Page 276 and 277:
6.3 Gains from Trade with Economies
Page 278 and 279:
United States aLC = 1 L = 100 Franc
Page 280 and 281:
thirty racks of clothing, then each
Page 282 and 283:
model best describes markets in whi
Page 284 and 285:
2. Each firm produces a product tha
Page 286 and 287:
2. The demand assumption in which e
Page 288 and 289:
Keep in mind that this is the equil
Page 290 and 291:
KEY TAKEAWAYS A market equilibrium
Page 292 and 293:
1. If the product is such that an i
Page 294 and 295:
varieties may increase aggregate we
Page 296 and 297:
7.1 Basic Assumptions of the Partia
Page 298 and 299:
2. The term used to describe a coun
Page 300 and 301:
where XSUS(.) is the export supply
Page 302 and 303:
This implies also that world supply
Page 304 and 305:
1. The price that equalizes one cou
Page 306 and 307:
The price that ultimately prevails
Page 308 and 309:
Surplus", some firm would be willin
Page 310 and 311:
Changes in Producer Surplus Suppose
Page 312 and 313:
2. The term used to describe a meas
Page 314 and 315:
the same price for their product re
Page 316 and 317:
to purchase the Mexican wheat at $1
Page 318 and 319:
The effect on the foreign price is
Page 320 and 321:
The quantity of imports and exports
Page 322 and 323:
the sum of the gains exceeds the su
Page 324 and 325:
indicate the effect of each policy
Page 326 and 327:
7.6 The Optimal Tariff LEARNING OBJ
Page 328 and 329:
zero. Somewhere between a zero tari
Page 330 and 331:
3. The tariff rate that corresponds
Page 332 and 333:
KEY TAKEAWAYS An import tariff wil
Page 334 and 335:
7.8 Import Tariffs: Small Country W
Page 336 and 337:
3. The tariff causes a redistributi
Page 338 and 339:
1. Where on the graph is the level
Page 340 and 341:
We examine the effects of optimal t
Page 342 and 343:
3. Given player one’s optimal pol
Page 344 and 345:
The goal of a cooperative equilibri
Page 346 and 347:
1. Use the information provided in
Page 348 and 349:
7.10 Import Quotas: Large Country P
Page 350 and 351:
An import quota will reduce the qua
Page 352 and 353:
KEY TAKEAWAYS To administer a quot
Page 354 and 355:
demand is equal to the quota level.
Page 356 and 357:
market decreases producer surplus i
Page 358 and 359:
Foreign National Welfare 2. Suppose
Page 360 and 361:
This implies that, in the case of a
Page 362 and 363:
Quota Rents National Welfare + C
Page 364 and 365:
Import Quota (Administered by Givin
Page 366 and 367:
to as tariffication. In this way, f
Page 368 and 369:
Next, consider the effects in this
Page 370 and 371:
In situations where market changes
Page 372 and 373:
where S is the specific export subs
Page 374 and 375:
7.17 Export Subsidies: Large Countr
Page 376 and 377:
the subsidy payments are made, then
Page 378 and 379:
An export subsidy of any size will
Page 380 and 381:
2. Identify the effects of a counte
Page 382 and 383:
Table 7.12 "Welfare Effects of the
Page 384 and 385:
Consumer Surplus − (G + H + I + J
Page 386 and 387:
KEY TAKEAWAYS An antisubsidy law,
Page 388 and 389:
9. What is the change in government
Page 390 and 391:
Notice that a unique set of prices
Page 392 and 393:
in the import country and in the ca
Page 394 and 395:
Figure 7.36 Welfare Effects of a VE
Page 396 and 397:
the quota rents will benefit, but p
Page 398 and 399: A the variable change is ambiguous
Page 400 and 401: Mexico, and all wheat sold in Mexic
Page 402 and 403: 7.23 Export Taxes: Large Country We
Page 404 and 405: Because there are both positive and
Page 406 and 407: − the variable decreases 0 the va
Page 408 and 409: 8.1 Chapter Overview LEARNING OBJEC
Page 410 and 411: If a domestic consumption tax is im
Page 412 and 413: Equivalency between Domestic and Tr
Page 414 and 415: An import tariff applied on an impo
Page 416 and 417: KEY TAKEAWAYS Domestic production
Page 418 and 419: a Domestic Production Subsidy", whi
Page 420 and 421: Domestic policies can affect trade
Page 422 and 423: + the variable increases − the va
Page 424 and 425: Domestic consumption taxes are ofte
Page 426 and 427: Figure 8.3 Inducing Exports with a
Page 428 and 429: 8.7 Consumption Tax Effects in a Sm
Page 430 and 431: Since the cost to consumers exceeds
Page 432 and 433: When a specific consumption tax “
Page 434 and 435: time of the founding of the nation,
Page 436 and 437: Chapter 9 Trade Policies with Marke
Page 438 and 439: Market imperfections or market dist
Page 440 and 441: EXERCISE 1. Jeopardy Questions. As
Page 442 and 443: firm’s welfare) by restricting su
Page 444 and 445: are neatly kept and homes are well
Page 446 and 447: Policy-Imposed Distortions Another
Page 450 and 451: Welfare-Improving Policies in a Sec
Page 452 and 453: Summary of the Theory of the Second
Page 454 and 455: 9.4 Unemployment and Trade Policy L
Page 456 and 457: Suppose that international market c
Page 458 and 459: 9.2 "Welfare Effects of an Import T
Page 460 and 461: Begin with the same surge of import
Page 462 and 463: eliminate the same unemployment imp
Page 464 and 465: A the variable change is ambiguous
Page 466 and 467: their own production efficiency imp
Page 468 and 469: Suppose that the infant industry ar
Page 470 and 471: This means that in the second perio
Page 472 and 473: The Economic Argument against Infan
Page 474 and 475: world efficiency standards, protect
Page 476 and 477: 9.6 The Case of a Foreign Monopoly
Page 478 and 479: Assuming the monopolist maximizes p
Page 480 and 481: Import tariff effects on the import
Page 482 and 483: This shows that although a tariff c
Page 484 and 485: 2. Recognize that a trade policy ca
Page 486 and 487: consider a large importing country
Page 488 and 489: the subsidy is set too high, the lo
Page 490 and 491: 9.8 Public Goods and National Secur
Page 492 and 493: nonexcludable because once it is th
Page 494 and 495: efficiency loss. Nevertheless, the
Page 496 and 497: 5. The term describing a ìgoodî l
Page 498 and 499:
the environment. On the other hand,
Page 500 and 501:
Pollution Effect National Welfare
Page 502 and 503:
Govt. Revenue Pollution Effect + e
Page 504 and 505:
A Source of Controversy For many en
Page 506 and 507:
This statement points out that many
Page 508 and 509:
noneconomists, providing permits th
Page 510 and 511:
[4] World Trade Organization, “Tr
Page 512 and 513:
product categories. This type of tr
Page 514 and 515:
The key question of interest concer
Page 516 and 517:
Figure 9.10 "Harmful Trade Diversio
Page 518 and 519:
Free trade area effects on Country
Page 520 and 521:
We assume that A has a specific tar
Page 522 and 523:
The simple way to do that is to ima
Page 524 and 525:
Chapter 10 Political Economy and In
Page 526 and 527:
do indeed seek to maximize national
Page 528 and 529:
a representative democracy, governm
Page 530 and 531:
3. This type of lobbying does not i
Page 532 and 533:
much larger than the number of firm
Page 534 and 535:
We can now ask whether a household
Page 536 and 537:
Large groups are much less effectiv
Page 538 and 539:
Because the per-producer benefit of
Page 540 and 541:
clearly he or she would vote for th
Page 542 and 543:
10.7 The Lobbying Problem in a Demo
Page 544 and 545:
Chapter 11 Evaluating the Controver
Page 546 and 547:
the results from any one model. Ins
Page 548 and 549:
increase in national welfare. This
Page 550 and 551:
4. The enhancement of this is what
Page 552 and 553:
of the real world. The real world c
Page 554 and 555:
Another way to deflect the concern
Page 556 and 557:
For example, an optimal tariff or o
Page 558 and 559:
Stuart Mill in hisPrinciples of Pol
Page 560 and 561:
11.5 The Economic Case against Sele
Page 562 and 563:
to eliminate some of the inefficien
Page 564 and 565:
effects, it would then need to meas
Page 566 and 567:
to avoid the use of any such policy
Page 568 and 569:
Selected protection requires detail
Page 570 and 571:
11.6 Free Trade as the “Pragmatic
show all

International Trade - Theory and Policy, 2010a

Create successful ePaper yourself

Delete template?

Save as template?