Beruflich Dokumente
Kultur Dokumente
International Trade
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2006 Thomson/South-Western
The U.S. has an absolute advantage, can produce more of both with fewer resources than other producers require But following the law of comparative advantage, the U.S. is the low cost producer, with 7 a comparative advantage in the production of clothing, while Izodia has a comparative advantage in the production of food
Autarkey equilibrium
Autarkey equilibrium
Exhibit 4 illustrates the possible combinations of food and clothing that each country can produce and consume if all resources are fully and efficiently employed and there 8 is no trade: Autarky is the situation of national self-sufficiency. The fact that both PPFs are straight lines implies a constant opportunity cost.
Terms of Trade
Before the countries can trade, the terms of trade must be established Terms of trade refers to how much of one good exchanges for a unit of another good Suppose that market forces dictate that 1 unit of food trades for 1 unit of clothing
The U.S. consumption possibilities frontier stops at 400 million units of clothing because that is the most that Izodians can produce With production and specialization, the U.S. produces 600 units of food, consumes 400 units, and exchanges the rest for 200 million units of Izodian clothing. 10 Izodians produce 400 units of clothing, wear 200 million units, and exchange the rest for 200 million units of U.S. food
Summary
The only constraint on trade is that, for each good, total world production must equal total world consumption Specialization and trade allow both countries to consume more of both goods
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Tariffs
Tariff: a tax on imports and can be either specific or ad valorem
Specific tariff is a fixed fee amount, for example a tariff of $5 per barrel of oil Ad valorem tariff is a percentage of the price of imports at the point of entry
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Import Quotas
Import quota: a legal limit on the quantity of a particular commodity that can be imported Usually target imports from certain countries To have an impact on the domestic market, or to be effective, a quota must restrict imports to less than the amount imported with free trade
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After the quota, the new U.S. price, $0.15 per pound, is determined by the intersection of the new supply curve, S', with the U.S. demand curve, D.
The blue shaded areas show the loss in consumer surplus captured by domestic producers and those permitted to fulfill the quota. The pink-shaded triangles illustrate the net 16 welfare cost of the quota on the U.S. economy.
Quotas in Practice
Quota rights are awarded to exporters through a variety of means By rewarding domestic producers with higher prices and foreign producers with the right to sell goods to the United States, the quota system creates two groups intent on securing and perpetuating these quotas
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GATT
General Agreement on Tariffs and Trade GATT an international tariff-reduction treaty adopted in 1947 that resulted in a series of negotiated rounds aimed at freer trade
Adopted by 23 countries, including the United States Treat all member nations equally with respect to trade Reduce tariff rates through multinational negotiations Reduce import quotas Set the stage of many trade rounds which offer a package approach rather than an issue-by-issue approach to trade negotiations
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Trading Rounds
Most early GATT trade rounds aimed at reducing tariffs The Kennedy Round in the mid-1960s included new provisions against dumping Recent Uruguay round created the World Trade Organization to take over from GATT
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Common Markets
European Union.
Began in 1958 and now has expanded to 25 nations Intended to create a barrier-free European market in which goods, services, people, and capital are free to flow to their highest-valued use without restrictions Twelve members of the European Union have adopted a common currency, the euro, that replaced national currencies in January 2002
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Common Markets
Other trading blocs
The Association of Southeast Asian nations: ASEAN South Africa and its four neighboring countries: Southern African Customs Union Half dozen Latin American countries: Mercosur United States, Canada, and Mexico: NAFTA
Mexico hopes to increase U.S. investment by guaranteeing dutyfree access to U.S. markets to those who build manufacturing plants in Mexico The U.S. wants access to Mexicos 100 million people and its huge oil reserves U.S. would like to bolster Mexicos move toward a marketoriented economy
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Problem with this argument is that most industries can make this same argument
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How should government identify which industries merit protection, and when do they become old enough to look out for themselves?
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The immediate cost of such restrictions is the net welfare loss from higher domestic prices Which may become permanent if the industry never realizes the expected economies of scale
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Antidumping Argument
Dumping is selling a commodity abroad at a price that is below its cost of production or below the price charged in the home market critics argue that a tariff should be imposed to raise the price of dumped goods Key question: Why should U.S. consumers be prevented from buying products for as little as possible even if these low prices are the result of a foreign subsidy?
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Antidumping Argument
If the dumping is persistent, the lower price may increase consumer surplus by an amount that more than offsets losses to domestic producers there is no good reason why consumers should not be allowed to buy imports for a persistently low price An alternative form of dumping, termed predatory dumping, is the temporary sale of an export at a lower price in order to drive out competing producers in that foreign market
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Import Substitution
The country manufactures products that until then had been imported and imposes tariffs and quotas to protect these industries Popular for several reasons
Demand already existed for these products Provides infant industries with a protected market Those who already supply capital, labor and other resources to the favored industries gain
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Import Substitution
Problems
Reduces the gains from specialization and comparative advantage Low-cost foreign goods with high-cost domestic goods Since they are shielded from foreign competition, domestic industries fail to become efficient Encourages retaliation from other countries
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Export Promotion
A development strategy that concentrates on producing for the export market Preferable approach because the emphasis is on comparative advantage and trade expansion rather than trade restriction Also forces producers to grow more efficient to compete on world markets
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