Econ 1202 1st Edition Lecture 24 Outline of Lecture 23 (Monetary and Fiscal Policy (continued)/Schools of Macroeconomic Thought)I. “Greece Creditors Grim on Prospects of Deal”II. “Fed Shies Away From June Rate Hike”III. Limitations/Considerations of Fiscal and monetary PolicyIV. Macroeconomics Starts with KeynesV. Monetarists (Milton Friedman)VI. Rational Expectations (Robert Lucas)VII. Is the Short-Run Philips Curve Really Vertical?VIII. Real Business Cycle (Edward Prescott)IX. Austrian School (Friedrich von Hayek)Outline of Lecture 24 (Globalization and Tariffs)I. First Stop: David RicardoII. Law of Comparative Advantage and the Corn LawsIII. Rise of Free TradeIV. Real World Trade: Not Complete SpecializationV. What Causes a Nation to Have the Comparative Advantage?VI. External Economics: Economics of ClusteringVII. World Without TradeVIII. World With TradeIX. Formal TermsX. Direction of TradeXI. Winners and Losers From Trade: Export SideXII. Winners and Losers From Trade: Import SideXIII. What’s All the Fuss Then?XIV. Impact of TariffsXV. The Effects of a TariffGlobalization and TariffsI. First Stop: David Ricardoa. Born in 1772 and died in 1823b. Stockbroker turned Landlord, Politician, and Economistc. “Principle’s of Political Economy and Taxation” 1817II. Law of Comparative Advantage and the Corn Lawsa. Basis for all free trade arguments: a brilliant, but tricky theory that turns on understanding the difference between comparative vs. absolute advantageb. Free markets are not paint-free; there are winners and losers from trade, but a country is better off through tradeIII. Rise of Free Tradea. Tariff structure and Napoleonic Warsi. Corn Laws-tariffs on gains after the Napoleonic Warsii. Impact on real wages of industrial workersiii. Anti-Corn League in 1836iv. Corn Laws are repealed in 1846b. By the 1850’s, Britain unilaterally eliminates tariffsi. 1820’s: over 50%; high as a little under 65%ii. 1870’s: less than 10%c. Transition from agricultural to manufacturing centric economyd. British Low Cost Producer; implicit economic incentives; don’t need or want tariffs; want market expansione. Late 19th century: First Great Globalization Erai. Lower tariffsii. Transportation changes1. Clippers and steamships iii. Smithian GrowthIV. Real World Trade: Not Complete Specializationa. Goods and services are generally not produced by only one nationb. Not all goods and services are traded internationallyi. Example: haircutsc. Production of many goods involves increasing opportunity costs so small amounts of production are likely to take place in several countriesd. Products are often differentiated, and thus, have unique attributes or qualitiesi. Countries may have comparative advantages in the different sub-types/qualities of these differentiated products1. Example: BMW vs. Ford FocusV. What Causes a Nation to Have the Comparative Advantage?a. Climate and Natural Resourcesi. Some nations are better-suited to particular types of production; particularly important for agricultural goodsb. Relative Abundance of Labor and/or Capitali. Some nations have lots of high or low-skilled workers or relatively much or little infrastructurec. Technological Differencesi. Technologies may not diffuse quickly or uniformlyd. External Economiesi. Reductions in a firm’s costs may result from an increase in the local size of that industryVI. External Economics: Economics of Clusteringa. Specialized producers within industrial districts create external; economies or “spillover effects” which create positive feedbacks and creates “industrial magnets”b. From Waterbury (brass) to East Hampton (bells) to New York (fashion) to Silicon Valley (technology)i. Example: if you are a brass worker, you would migrate to Waterbury1. Think about the human capital accumulation that occurs through this migration and then you would locate there of you want to enter that industryc. Localized production by many interrelated companies generates cavalcade of new ideas and human capital accumulationd. Economic clustering e. The central idea is that the concentration of production in a particular location generates external benefits for firms in that location through knowledge spillovers, labor pooling, and close proximity of specialized suppliersi. This creates comparative advantagesVII. World Without Tradea. The equilibrium without tradei. Only domestic buyers and sellersii. Equilibrium price and quantity are determined on the domestic marketiii. Total benefits=consumer and producer surplusVIII. World With Tradea. World Price-price of a good that prevails in the world market for that goodb. Domestic Price-opportunity cost of the good on the domestic marketi. Assume that prices are set in the world market and countries can’talter that priceIX. Formal Termsa. Imports-goods and services bought domestically, but produced in other countriesb. Exports-goods and services produced domestically, but sold in other countriesX. Direction of Tradea. Compare domestic price with world pricei. Determine who has comparative advantage1. If domestic price<world pricea. Export the goodb. The country has comparative advantage2. If domestic price>world pricea. Import the goodb. The world has comparative advantageXI. Winners and Losers From Trade: Export Sidea. Exporting Countryi. Domestic equilibrium price before trade is below the world priceii. Once trade is allowed:1. Domestic price rises to equal to the world price2. Domestic quantity supplied is greater than domestic quantity demanded3. The difference is exportsb. There are winners and losersc. Free markets aren’t pain free, but international trade raises the economicwell-being of a nation because the gains of the winners exceed the losses of the losers and there is a higher total surplusXII. Winners and Losers From Trade: Import Sidea. Importing Countryi. Domestic equilibrium price before trade is above world price ii. Once trade is allowed:1. Domestic price drops to equal the world price2. Domestic quantity supplied is less than domestic quantity demanded3. The difference is importsb. There are winners and losersc. Free markets aren’t pain free, but international trade raises the economicwell-being of a nation because the gains of the winners exceed the losses of the losers and there is a higher total surplusXIII. What’s All the Fuss Then?a. Variety of issues/considerationsb. The winners’ winnings exceed the losers’ losses for