STUDY GUIDE (INR 4702 FINAL) Chapter 2 1. What two principles are at the foundation of the WTO? Market Liberalization: Free trade is good for everyone, it improves the worlds state of welfare, should increase everyone’s standard of living. Non-Discrimination: Ensure each member of WTO face equal opportunity to trade w/ one another. Forms of Non-Discrimination: MFN & National treatment 2. What are the exceptions to these two principles? • Regional Trade Agreements: Trade agreements b/w 2 or more countries, usually located in same region of the world, in which each country offers preferential market access to others. o Free Trade Areas: Governments eliminate tariffs on members goods, but keep independent tariffs on goods from other countries. o Custom Unions: Member governments eliminate all tariffs on trade b/w members & impose common tariffs on nonmembers. • Generalized System of Preferences: Allows the advanced industrialized countries to apply lower tariffs to imports from developing countries than they apply to the same goods coming from other advanced industrialized countries. Chapter 3 1. Trade bargaining – understand spatial theory. You will be asked to interpret a graph. Why do governments NOT unilaterally liberalize trade? What area represents a potential agreement? Cannot improve utility relative to the status quo from unilateral liberalization. Drawing indifference curves sees an outcome each group prefers to the status quo. Each group prefers all outcomes interior to this indifference curve to the status quo. Contract curve- the set of mutually beneficial agreements that exhaust available joint gains.2. What factors impact bargaining power? 1) Patience 2) Outside Options Chapter 4 1. There will be a scenario like the homework assignment. 2. Ex: Brazil and the UK open their borders to trade with one another. There are two factors of production, capital and land and two goods being produced, automobiles and oranges. Which country specializes in autos? UK Oranges? Brazil In the long-run what happens to the price of land in the UK? In the long run In Brazil? Why? What theory tells us that over time we should see factor prices across the two countries converge? Stolpher Samuelson Theorem What group will demand protection in each country? The industry, which is hurt by, trade (Brazils auto industry and the UKs orange industry). What model gives this prediction? Factor Model Factor mobility is assumed to be at what level in this model? High which means that factors of production can easily move from one sector of the economy to another. 3. In the short-run, how does trade impact the auto industry in the UK? Having access to a larger market, the auto industry in the UK will expand, meaning production will rise and land and capital will be demanded. In Brazil? Facing competition from cheaper UK autos, the auto industry in Brazil will contract, meaning production falls and land and capital are liquidate (released). Will we see the same policy preferences within the auto industry, across the two countries? No. What does the sector model assume about factor mobility? Low meaning factors of production are tied to their industry. 4. What determines the type of political cleavages that form as a result of free trade? Class (Landowners, vs. Capitalists vs. Workers). If factor mobility is high, what groups do we except to compete over trade policy? What is our expectation when factor mobility is low? Chapter 5 1. What is the justification for enacting trade barriers to protect infant industries? A long run increase in social welfare due to the growth of this new industry. Argues that there are cases in which newly created firms will not be efficient initially but could be efficient in the long run if given time to mature.2. What is industrial policy? Know some concrete examples of its use. For example, government procurement practices. Be able to answer the following question: what types of policies would be put into place in order to protect infant industries, other than trade barriers? Industrial Policy: The use of policy instruments in order to channel resources away from some industries & direct them toward those industries the state wishes to promote. • Tariffs & Quotas • Government Procurement Practices: Governments can purchase goods from the domestic supplier, rather than foreign suppliers. • Subsidies: especially for R&D • Infrastructure, worker training, lost cost loans, subsidized energy, export subsidies, & tax incentives 3. What are some of the criticisms against government involvement in the economy? For example, if capital markets are efficient and the private market has not allocated capital to a potential infant industry, will government intervention be in the best interest of the nation? Not the best place to allocate domestic resources. Therefore, government intervention is never welfare enhancing. On the other hand, if markets are not efficient, which policy option is most preferred with respect to national welfare: tariffs or subsides? Provide the loans that the capital market has failed to provide rather than subsidize which gives no incentive to the firm to become more efficient. Think about how tariffs and subsides impact the entire economy. Which policy option produces less dead weight loss? Why? Subsidies are more preferred than tariffs as they are less welfare reducing in the short run. Would a loan be even more appropriate? Why? Think about which actor assumes the risk of the investment if a subsidy is given versus a loan.Chapter 6 1. What two theories transformed the protectionist policies of LDCs into a full model for development? 1) Structuralism 2) Dependency 2. Structuralism is based on what premise? Higher standards of living could only be achieve through industrialization According to structuralism, agricultural resources will not reallocate to the manufacturing sector because of two types of market failures. What are they? Define them. Complimentary Demand (Demand-side perspective): A market failure structuralists believed would limit automatic industrialization. In an economy in which few people earn a money wage, no single manufacturing can sell its product unless other manufacturing activities are started simultaneously. Pecuniary External Economies (Supply-side perspective): A market failure structuralists believed would limit automatic industrialization that arises from the