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Flashcards in Econ 420 Final Deck (16)
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1
Q

Offer Curve

A

The offer curve is the combination of all tangencies of all indifference curves.An offer curve shows the quantity of one type of product that an agent will export (“offer”) for each quantity of another type of product that it imports.

2
Q

Trade Diversion

A

Trade diversion means that a free trade area diverts trade away from a more efficient supplier outside the free trade area, towards a less efficient supplier within the free trade area. Trade diversion occurs when lower cost imports from outside the custom unions are replaced by high cost imports from a union member due to the preferential treatment given to member nations. It is harmful because it reduces welfare by shifting production from more efficient producers outside the customs union to less efficient producers inside the custom union. The international allocations of resources are therefore worsened and the production is shifted away from the comparative advantage base.

3
Q

Consumer and Producer Surplus When a Tariff is Imposed

A

The impact of a tariff on producer surplus causes it to go up. However, if a producer is importing raw material, then he is hurt as well. The impact of a tariff on consumer surplus causes it to go down, The amount by which each gains or loses is determined by the elasticity of the demand curve . The more elastic the curve, the smaller the increase in producer surplus and the smaller the elasticity, the greater the increase in producer surplus. Similar for Consumer Surplus

4
Q

Transfer Pricing

A

This is a strategy used by MNCs to take advantage of differing tax rates in different countries. Through intra-firm trade, MNCs overprice the products shipped to an affiliate in a high tax country so that it will have a small profit.Similarly, they will under price products and ship them to a low tax country so that it will have a large profit. The result is a net tax saving.It is difficult for a host country government to determine whether MNC’s implement transfer pricing strategy because the transferred products are often unique and there is no local market for such products to identify what their reasonable prices are.

5
Q

Most Favored Nation Principle

A

Relating to a commercial treaty in which countries agree to accord each other the same favorable terms that are offered in agreements with any other nation.

6
Q

Trade between 2 countries with identical production possibility curves vs. trade between 2 countries with different production possibilities curves

A

Although two countries have identical PPCs, if their indifferent curves are different and thus their domestic exchange rates are different, each country should specialize and trade. Each country will be better off. Although two countries have different PPCs, their indifferent curves are in such a way that makes domestic exchange ration identical, then there will be no trade.

7
Q

dumping

A

The selling of goods below cost abroad to conquer new markets. Consumers abroad pay significantly less for these goods than they would pay domestically. Those who benefit from protection against dumping are producers of goods in countries abroad. It eliminates competition.

8
Q

the case where the burden of the tariff is borne mainly by the consumers of the importing country (Use graphs)

A

Consumers have burden with inelastic demand while producers have burden with elastic demand.

9
Q

quotas vs. tariffs (use graphs)

A

A quota is a direct quantity restriction on the amount of a commodity allowed to be imported or exported. A tariff is a tax or duty levied on the traded good as it crosses a national boundary. There are two kinds of tariffs:
o Ad valorem : fixed percentage of the value of traded good
o Specific: fixed sum per physical unit of traded commodity

10
Q

the impact of a tariff on producers, consumers, and government (use graphs)

A

THe distribution of a burden of a tariff is the decline in the consumer surplus and increased producer surplus and increased government revenue.

11
Q

briefly discuss different arguments for tariffs and comment on their validity

A

• Protect high paid jobs from cheap foreign labor
• Defense – watch industry  timing bombs during war time
• Protect infant industry  Germany’s switch from agricultural to industrial economy by protecting a weak industry and strengthen it
o Frederick List theory (static-comparative advantage until we can compete)
o Which industries will improve? How do we know?  Political lobbies
• Multinationals: today some countries still have low wages and latest technologies
o Changes everything
• Outsourcing? (today and future conflicts)
o Either countries can improve their standard of living OR
o We lower ours OR
o Raise protective barriers

12
Q

how might have international trade hurt hurt third world countries in the past?

A

• The division of labor that was spurred in the late 19th century hurt third world countries in the past was the dependency they had on the North.
• By only exporting raw materials and importing manufactured goods, these countries became more and more dependent
o Dependent on economic well-being of industrial nations
o If industrial nations were to go into depression/recession, third-world is dragged in as well  they can’t do anything about it!
o Recession:
 Demand for raw materials goes down
 Substantial decline in P
 Decline in export earning capacity

13
Q

How did ISI affect Third World Countries trade relations?

A

Import Substitution Industrialization (ISI)

  1. influence of Prebisch/ECLA thesis
  2. goal – diversify economies
  3. ISI policies
    - protection through tariffs, exchange controls
    - attraction of multinationals (wanted investors from the center to invest in periphery)
    - state enterprises
    - development banks
    - ISI was ‘across the board’
  4. growth impact – industry as leading sector, change in GDP structure
  5. problematic aspects of ISI

as import coefficient goes down, the more success you have in diversifying

M/GDP = value of imports of TVs/
Imports of TVs + manuf TVs

  • Increasing M/GDP = becoming more independent
  • but if price of the country’s exports (coffee, cotton, etc) drops, the ability to import goes down since country isn’t specialized and they don’t make high profit
14
Q

Are the theories of comparative advantage and the Prebisch theory contradictory to each other? Explain

A

NO
• The comparative advantage theory says that at any point in time, a country should produce what it has the most comparative advantage and trade. This is a static theory.
• On the other hand, the Prebisch Thesis looks at how things change over time and how the fair division of labor in the 19th century might not be favorable. This theory needs to reconsider the division of labor as the world changes. It is a dynamic theory.

15
Q

What are the major differences between foreign direct investments in the late 19th century and early 20th century and such investments in the second half of the 20th century and the beginning of the 21st century?

A

• In late 19th and early 20th century
o There were no MNCs
o Most of the FDI in this period went to investment in infrastructure and mining petroleum
o FDI had very little impact in host countries
o They paid low taxes, exploited public utilities via favorable rates
o Government guarantee for high rate of returns
o They didn’t use local labor but brought skilled labor from abroad
o Helped bind developing countries to international trade as suppliers of primary goods
• 1930-1950
o Developing countries felt that they were exploited for national resources, public utilities are too valuable to be held by foreigners
o Host government didn’t pay for foreigners property arguing that they got so much profit in the past
• After WW2
o Rise of multinationals
 Economic integration  US breaking into EU market (produce within EU)
 ISI in many 3rd world countries attract MNCs to produce some products within these countries (they also support local industries)

16
Q

Discuss some of the positive and some of the negative aspects of multinationals.

A

• Inflow of foreign exchange
o Foreign exchange raised reserves of developing countries; positive effect on BOP
• Access to technology  MNCs bring it, host country welcomes it
• Modern organization: efficient business practices
• Human capital development: skilled labor from abroad but recent switch to local labor (ex-patriots lived like kings)
• Stimulation of local supply firm: bought parts from local manufacturers
o Developmental outreach, outsource locally
• Help diversify exports: increase n contacts, global presence
NEGATIVES
• BOP worsens from profit remittances: sooner or later it will drain reserves
• Transfer pricing: defined above
• Little R&D: usually done in parent countries; host is more dependent on MNC
o R+D is trump card cannot compromise that technology
• Cost of technology: payoff for investment, higher prices to cover cost
• Consumption distortions: Distributed income in 3rd world is very concentrated (rich get richer, poor get poorer)
o Advertising to change behavior of local manufacturers  manipulate and sell
• Denationalization: Buy out local industries
• Transfer of decision making centers abroad  Parent company calls all the shots
• Politics: manipulate taxes by pressuring diplomats to pressure host country government