ECN 203 1nd Edition Lecture 31Outline of Last Lecture II. Intervention III. Crowding out EffectIV. Non-Interventionist and Interventionist ViewsOutline of Current Lecture V. Theory of TradeVI. Trade Policy Toolsa. Competitive Edgeb. Red Tape and Regulationsc. Exchange Rate Manipulationd. Quotas and Tariffs Current LectureLecture 4/13- Theory of Trade o From the World Trade Organization’s website: “All countries have the assets that they can employ to produce foods and services for their domestic markets or to compete overseas…”o Global economic relations are a strategic game because nations determine their trade policies, other nations have the power to respond. They can be negotiated. o It is not simple. Nations have tools that they use to affect their global trade position. o Most economists support Free and Fair Trade- Trade Policy Tools o Competitive Edge by Lowering Costs of Production A nation can change its global position by lowering cost of production and offering a better price. Constructive:- Can be done by increasing efficiency of lowering factor costs. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Destructive - Can be done by exploiting workers through no child labor restrictions, no limits on working hours, or no safety rules. These significantly lower cost production and create an advantage of countries that impose regulations. o Red Tape and Regulations Nations make it harder to sell their market by making “red tape” and regulationsto be used as difficulties to foreign products. These policies raise transaction costs. These obstacles are often difficult to remove. Constructive:- These regulations are often look to protect workers or an entrepreneur’screative ideas or protection consumers or environmental conditions. Destructive:- These regulations are often created by political leaders looking to protect the domestic producers from foreign competition (rent seeking behavior). o Exchange Rate Manipulation Destructive:- When a nation manipulates its own currency to make it weaker. - This improves the nation’s competitive price position so all their goods are “on sale”.- This increases (X-M)- For example, China instituted a policy to weaken its currency with respect to the US dollar. China was able to keep the dollar/renminbi exchange rate constant for 9 years.o Quotas and Tariffs Quotes – when a nation sets a limit on imports in order protect domestic producers from competition. - Risks retaliation from other nations. Tariffs – a tax on imports which give domestic producers a price advantage. Ex. The higher the tariff, the high the price of import.- Risks
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