International Trade - Theory and Policy, 2010a

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increase in national welfare. This result was demonstrated in the Ricardian model, the immobile factor model, the specific factor model, the Heckscher-Ohlin model, the simple economies-of-scale model, and the monopolistic competition model. The result can also be shown if there are differences in demand between countries. Each of these models shows that a country is likely to have greater national output and superior choices available in consumption as a result of free trade. Production Efficiency Improvements in production efficiency mean that countries can produce more goods and services with the same amount of resources. In other words, productivity increases for the given resource endowments available for use in production. In order to achieve production efficiency improvements, resources must be shifted between industries within the economy. This means that some industries must expand while others contract. Exactly which industries expand and contract will depend on the underlying stimulus or basis for trade. Different trade models emphasize different stimuli for trade. For example, the Ricardian model emphasizes technological differences between countries as the basis for trade, the factor proportions model emphasizes differences in endowments, and so on. In the real world, it is likely that each of these stimuli plays some role in inducing the trade patterns that are observed. Thus as trade opens, either the country specializes in the products in which it has a comparative technological advantage, or production is shifted to industries that use the country’s relatively abundant factors most intensively, or production is shifted to products in which the country has relatively less demand compared with the rest of the world, or production shifts to products that exhibit economies of scale in production. If production shifts occur for any of these reasons, or for some combination of these reasons, then trade models suggest that total production would rise. This would be reflected empirically in an increase in the country’s gross domestic product (GDP). This means that free trade would cause an increase in the level of the country’s national output and income. Consumption Efficiency Consumption efficiency improvements arise for an individual when changes in the relative prices of goods and services allow the consumer to achieve a higher level of utility. Since the change in prices alters the choices a consumer has, we can say that consumption efficiency improvements imply that more satisfying Saylor URL: http://www.saylor.org/books Saylor.org 547
choices become available. When multiple varieties of goods are available in a product category, as in the monopolistic competition model, then consumption efficiency improvements can mean that the consumer is able to consume greater varieties or is able to purchase a variety that is closer to his ideal. Although improvements in consumption efficiency are easy to describe for an individual consumer, it is much more difficult to describe consumption efficiency conceptually for the aggregate economy. Nevertheless, when aggregate indifference curves are used to describe the gains from trade, it is possible to portray an aggregate consumption efficiency improvement. One must be careful to interpret this properly, though. The use of an aggregate indifference curve requires the assumptions that (1) all consumers have identical preferences and (2) there is no redistribution of income as a result of the changes in the economy. We have seen, however, that in most trade models income redistribution will occur as an economy moves to free trade, and it may be impossible to redistribute afterward. It is also likely that individuals have different preferences for goods, which also weakens the results using aggregate indifference curves. KEY TAKEAWAYS The main sources of support for free trade are the positive production and consumption efficiency effects that arise in numerous models when countries trade freely. Production efficiency improvements mean that countries produce more goods and services with the same amount of resources. Consumption efficiency improvements mean that countries consume a more satisfying mix of goods and services. EXERCISE 1. Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?” 1. The term often used as a synonym for an improvement in economic efficiency. 2. The type of efficiency improvement in which productivity rises for the given resource endowments available for use in production. 3. The type of efficiency improvement relating to consumer choice adjustments in response to a policy change. Saylor URL: http://www.saylor.org/books Saylor.org 548
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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.
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Tariffs vary according to time of e
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1.9 Appendix B: Bound versus Applie
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EXERCISE 1. Jeopardy Questions. As
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2.1 The Reasons for Trade LEARNING
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For example, the Ricardian model of
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2. Learn the major historical figur
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could end up with more of both good
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The primary issue in the analysis o
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Real wages (and incomes) of individ
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he begins planting seeds in the sec
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In this way, we might raise the wel
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2.3 Ricardian Model Assumptions LEA
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Utility Maximization and Demand In
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United States L C + L W = L France
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2. Suppose that the unit labor requ
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KEY TAKEAWAYS The equation aLC QC
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comparative advantage in newspaper
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−aLCaLW⎡⎣⎢hrslbhrsgal=gallb
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KEY TAKEAWAYS Labor productivity i
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2.6 A Ricardian Numerical Example L
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With full employment of labor, prod
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At this point, we can already see a
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The answer to some of these questio
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wC=PCaLC. If production occurs in t
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Thus a good way to think about how
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Similarly, by rearranging the above
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production. But where will they fin
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The focus on real wages allows us t
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Real Wages in Autarky To calculate
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exchange. Thus the real wage of che
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2.11 The Welfare Effects of Free Tr
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Free trade will raise aggregate wel
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Chapter 3 The Pure Exchange Model o
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A Simple Example of Trade Suppose t
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3.2 Determinants of the Terms of Tr
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Persuasion The art of persuasion ca
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KEY TAKEAWAY The terms of trade is
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two individuals make a voluntary ex
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3.4 Three Traders and Redistributio
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is not motivated by profit but inst
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The changes described above assume
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3.6 The Nondiscrimination Argument
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clothing worker. The same applies i
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the page, scroll down to the “Bou
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4.1 Factor Mobility Overview LEARNI
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argument that free trade can only b
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them, but only if the prices are ve
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4.3 Time and Factor Mobility LEARNI
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factor to be moved and become produ
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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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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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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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Page 506 and 507: This statement points out that many
Page 508 and 509: noneconomists, providing permits th
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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 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
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