International Trade - Theory and Policy, 2010a

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KEY TAKEAWAYS Labor productivity is defined as the quantity of output produced with one unit of labor; in the model, it is derived as the reciprocal of the unit labor requirement. Opportunity cost is defined as the quantity of a good that must be given up in order to produce one unit of another good; in the model, it is defined as the ratio of unit labor requirements between the first and the second good. The opportunity cost corresponds to the slope of the country’s production possibility frontier (PPF). An absolute advantage arises when a country has a good with a lower unit labor requirement and a higher labor productivity than another country. A comparative advantage arises when a country can produce a good at a lower opportunity cost than another country. A comparative advantage is also defined as the good in which a country’s relative productivity advantage (disadvantage) is greatest (smallest). It is not possible that a country does not have a comparative advantage in producing something unless the opportunity costs (relative productivities) are equal. In this case, neither country has a comparative advantage in anything. EXERCISES 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 labor productivity in cheese if four hours of labor are needed to produce one pound. 2. The labor productivity in wine if three kilograms of cheese can be produced in one hour and ten liters of wine can be produced in one hour. 3. The term used to describe the amount of labor needed to produce a ton of steel. 4. The term used to describe the quantity of steel that can be produced with an hour of labor. 5. The term used to describe the amount of peaches that must be given up to produce one more bushel of tomatoes. Saylor URL: http://www.saylor.org/books Saylor.org 93
6. The term used to describe the slope of the PPF when the quantity of tomatoes is plotted on the horizontal axis and the quantity of peaches is on the vertical axis. 2. Consider a Ricardian model with two countries, the United States and Ecuador, producing two goods, bananas and machines. Suppose the unit labor requirements are aLBUS= 8, aLBE = 4, aLMUS = 2, and aLME = 4. Assume the United States has 3,200 workers and Ecuador has 400 workers. 1. Which country has the absolute advantage in bananas? Why? 2. Which country has the comparative advantage in bananas? Why? 3. How many bananas and machines would the United States produce if it applied half of its workforce to each good? 3. Consider a Ricardian model with two countries, England and Portugal, producing two goods, wine and corn. Suppose the unit labor requirements in wine production are aLWEng = 1/3 hour per liter andaLWPort = 1/2 hour per liter, while the unit labor requirements in corn are aLCEng = 1/4 hour per kilogram and aLCPort = 1/2 hour per kilogram. 1. What is labor productivity in the wine industry in England and in Portugal? 2. What is the opportunity cost of corn production in England and in Portugal? 3. Which country has the absolute advantage in wine? In corn? 4. Which country has the comparative advantage in wine? In corn? Saylor URL: http://www.saylor.org/books Saylor.org 94
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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
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
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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
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Page 72 and 73: The primary issue in the analysis o
Page 74 and 75: Real wages (and incomes) of individ
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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
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Page 92 and 93: −aLCaLW⎡⎣⎢hrslbhrsgal=gallb
Page 96 and 97: 2.6 A Ricardian Numerical Example L
Page 98 and 99: With full employment of labor, prod
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Page 102 and 103: The answer to some of these questio
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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
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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
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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
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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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EXERCISE 1. Jeopardy Questions. As
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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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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
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Selected protection requires detail
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11.6 Free Trade as the “Pragmatic
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International Trade - Theory and Policy, 2010a

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