Part 6. International Trade & Capital Flows Flashcards
(33 cards)
Autarky/closed economy
A country that does not trade with other countries.
Trade protection
A government places restrictions and limits or charges on X or M.
World price
The price of g/s in world markets for those to whom trade is not restricted.
Terms of trade:
The ratio of an index of the prices of country’s X to an index of the prices of its M expressed relative to a base value of 100.
If countries terms of trade are currently 102, the price of goods it exports have risen relative to prices of goods its M since the base period.
FDI
Ownership of productive resources (land, factories, natural resources) in a foreign country.
Multi national corporation
A firm that has made FDI in one or more foreign countries, operating production facilities and subsidiary companies in foreign countries.
Gross national product (GNP)
- This measures the total value of g/s produced by labour and capital of countries citizens.
- Does not include the income to capital owned by foreigners invested within a country.
- The income of a countries citizens working abroad is included.
Absolute advantage
The production of a good at a lower resource cost than another country.
Comparative advantage
The production of a good if it has a lower OC in production of that good, expressed as the amount of another good that could have been produced instead.
Ricardian model of trade
- Only has one FOP - labor; where differences in labor productivity due to differences in technology.
Heckscher-Ohlin model
- There is a redistribution of wealth within each country between labor and owners of capital; with price relatively less scarce FOP in each country will increase so owners of capital will earn more in England, and workers in Portugal in comparison to without trade.
- Good country imports will fall in price, and exports will rise.
- The trade of more capital intensive good in cloth produced in England, demand and price for capital will increase in England.
- In Portugal, increasing production in wine (labor intensive) increases demand for price of labor, and workers gain at expense of owners capital.
Reasons for trade restrictions support from economists:
- Infant industry - protection from foreign competition given to new industries to give them an opportunity to grow on an international competitive scale and get up the learning curve in terms of efficient production methods.
- National security - if imports are cheaper, it may be in the country’s best interest to protect producers of goods crucial to countries national defense, so those goods available domestically in event of conflict.
Reasons for trade restrictions have little support:
- Protecting domestic jobs - while some jobs are certainly lost, and some groups and regions negatively affected by free trade, other jobs (X or growth of domestic g/s) will be created and prices for domestic consumers less without import restrictions.
- Protecting domestic industries - industry firms use potential influence to get protection from foreign competition, usually at the detriment of consumers paying higher prices.
Types of trade restrictions:
- Tariffs - a tax on M collected by gov.
- Quotas - limits on the amount of M allowed over some period.
- X subsidies - gov. payments to a firm that X goods.
- Min. domestic content - a requirement some % of product content must be from domestic country.
- Voluntary X restraint - a country voluntarily restricts the amount a good can be X, in hope of avoiding tariffs or quotas imposed by trading partners.
Economic implications of trade restrictions:
- Tariff - placed on M increases the domestic price, decreases quantity imported, increases the quantity supplied domestically.
i. e. dom. producers gain, foreign X lose, dom. gov gains via amount of tariff revenues. - Quota - dom. producers gain, dom. consumers lose from an increase in domestic price.
- if import licenses are sold to foreign countries, the domestic gov. gains revenue.
Quota rents
If the domestic government does not charge import licenses, this amount is a gain to those foreign exporters who receive the import licenses under the quota.
Voluntary export restraint
The voluntary agreement by gov to limit the quantity of a good that can be exported; another way of protecting domestic producers in importing country.
They result in welfare loss to importing country equal to that of equivalent quota with no gov. charge for import licenses so no capture of quote rents.
Export subsidies
Payments by gov. to countries exporters benefiting producers of good, bit increase price and reduce CS in exporting country.
Small country - price increase by amount of subsidy = world price plus subsidy.
Large exporter - world price decreases and some benefits from subsidy accrues for foreign consumers, while foreign producers get negatively affected.
Effects of protectionist policies wrt importing country:
- reduce imports
- increase price
- reduce CS
- increase dom. qty supplied
- increase PS
all will reduce national welfare, but quotas and tariffs in the large country will increase national welfare under the assumption as large M would produce world price of goods.
Capital restrictions
This includes:
- outright prohitibtion of investment in domestic countries by foreigners
- prohibition of or taxes on income earned on foreign investments by domestic citizens
- prohibition of foreign investment in certain domestic industries
- restrictions on repatriation of earnings of foreign entities operating in a country
Effect of capital restrictions
- they are thought to decrease economic welfare.
- in the short term, they have helped developing countries avoid impact of great inflows of foreign capital during periods of optimistic expansion, and the impact of large outflows of foreign capital during periods of correction and market unease or outright panic.
- the short term benefits may not offset longer-term costs if the country is excluded from international markets for financial capital flows.
Benefits of increased trade on economic welfare:
- Increased trade according to comparative advantage
- Increased competition among firms in member countries.
Drawdowns of increased trade on economic welfare:
- Some firms/industeries/groups of workers will see their wealth and income decrease.
- Workers in affected industries may need to learn new skills to get new jobs
Why is economic welfare improved by reducing/eliminating trade restrictions:
- the extent that a trade agreement increases trade restrictions on imports from non-member countries, economic welfare gains are reduced and could be outweighed by costs such restrictions impose.
- If restrictions on trade with non-members countries increases countries (unrestricted) imports from a member has higher prices than countries previous imports from a non-member.
