INR 2002 Post Exam 2 Chapter 7 Feb 26 The Puzzle restrict trade Mercantilism Liberalism If trade between countries is mutually beneficial why does every country Extensive state regulation is in the economy s interest The state should protect its own economic interests at the expense of others Adam Smith was one of the first to tell us the market ensures that pursuit of self interest helps the public good States don t care what others gain as long as they gain Most important goal is maximizing wealth minimizing waste What we will learn about trade Today internationally trade is largely free However trade policies often differ between industries Barriers to trade hurt economic growth overall o Countries do so to protect domestic industries But free trade creates winners and losers International institutions help make cooperation on trade policy possible What s so good about trade The core concept of the economics of trade is comparative advantage Differs from absolute advantage the ability to do something better than others Comparative Advantage States are better at making certain goods than other goods States specialize in the goods they can make efficiently They trade for the goods they can t make efficiently Every country has a comparative advantage in something It is not necessary to have an absolute advantage to produce and export a product What s So Good about Trade Free Trade allows a country to pursue its comparative advantage o Importing goods that we cannot make very well allows us to focus on more efficient industries Restricting trade protectionism is costly to consumers Where does comparative advantage come from Hecksher Ohlin Theory All countries have basic factors of production o Land Unskilled labor Capital for investment human capital skilled labor Some countries have more of these things than others endowed with capital Production of goods uses different factors in different amounts Countries have a comparative advantage in goods that use their abundant o More supply cost of production goes down Countries will specialize in and export goods that use their abundant factors but not labor factors of production They import goods that use their scarce factors of production Industrial countries are rich in capital and skilled labor o What type of products will they export o Steel guns Developing countries are rich in land raw materials or unskilled labors o What types of products will they export o Diamonds unskilled labor resources What explains trade patterns Other economic links such as shared currencies encourage trade Noneconomic factors such as diplomatic relations also influence trade patterns Feb 28 Walmart Movie Day watched part 2 of movie Heart of strategy thinking and planning at what will be opening price items that are priced at rock bottom where Walmart hardly profits from selling it at such a low price o In order to get you in to buy things that aren t the opening price 1950 s Walmart had to compete with other nations overseas Low cost items from Asia regardless of American bought campaign 1970 s huge influx of international products imported products Overwhelmed with merchandise impact dramatically increased Walmart game was heavily reliant on China There were much higher profits on items made in low cost Asian imports 60 70 o Pressure on American sellers for low opening points need to put facility in China Move to China to meet low prices President Clinton agreement to open China s market to American Products Tremendous profit When opened to Western businesses boom in growth Backbone of industry might is migrant Chinese workers who work and live at factories o 30 25 to 50 cents an hour do anything to move forward Hundreds of billions of dollars of American investment Walmart has center in Southern China o 6 000 global suppliers 80 in China o Specifications price quality teach suppliers o Tough demands Bring competing people into offices with high pressure to reverse bidding o Better deal for importer TCL largest TV producer huge exporter to America o Walmart accounts for almost all exports increase speed to keep up Shin Jin 3rd busiest port in world Walmart s biggest Walmart China determined to take over o 15 billion worth of goods per year o gateway for overseas suppliers into America Promise of American exports to China o 36 billion in consumer products export in 3 billion in raw materials Overall this benefits China way more than America 120 billion trade deficit with China Jobs eliminated but not directly linked to unemployement Chinese consumers can t afford American products Theoretically gains from trade overcome losses Impact seen all over US China small town w factories and farms 1940s 50s and 70s All of a sudden huge pressure b c of international import o Lost Sa o contract because of Walmart Foreign competition China 1 3 of market o Hobson filed trade complaint b c Chinese pricing lower than world market Walmart chose the Chinese side Why would an American company testify to support jobs overseas They won case Chinese seen as dumping new tarrifs Walmart is helping China b c they are creating jobs where others jobs were lost However they are getting paid way less Creative destruction destroying competitors Is Walmart good for America Lower prices are good but workers ability to earn a livable wage decreases In 2004 285 billion deficit 162 trade deficit March 3 If comparative advantage is so great why don t states always trade Trade restrictions are the rule not the exception Protectionism The imposition of barriers to restrict imports Commonly includes devices including tariffs quotas and other non tariff barriers Trade barriers Any government limitation on the international exchange of goods Tools of protectionism Tariffs Tariffs taxes on imports Tariffs make foreign goods more expensive than domestic goods Ultimately the consumer pays tariffs Tools of protectionism Non tariff barriers Quotas limits on imports o Subsides tax breaks price guarantees Restrictions and Regulations Economic nationalism towards Americans Infant industries o Trying to do something give an incentive to push American products o Example Putting up barriers towards northern cars and making South Korean cars cheaper Shift in market conditions o With increasing oil prices U S intervened Protection necessary for national security Protectionism can be a response to other states protectionism Politics and Trade intersecting Trade can have drawbacks from a political
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