INR EXAM 2 Vocab Chapter 6 International Trade What s So Good about Trade Why Do Countries Trade What They Do Trade Restrictions Are The Rule Not the Exception Why Do Governments Restrict Trade The Domestic Political Economy of Protection Winners and Losers in International Trade Economic Interests and Trade Policy Domestic Institutions and Trade Policy Costs Benefits and Compensation in National Trade Policies How Do Countries Get What They Want The International Political Economy of Trade Strategic Interaction in International Trade Relations International Institutions in International Trade Explaining Trends and Patterns in International Trade Why within a Country Are Some Industries Protected and Some Not Why Have National Trade Policies Varied over Time Why Do Some Countries Have Higher Trade Barriers Than Others Why Has the World Trading Order Been More or Less Open at Different Times Conclusion Trade and Politics Free trade maximizes the welfare of each country If so why do barriers to trade The Puzzle exist Key Problems o Negative externalities o Collective Action Problem o Cooperation Monitoring Cheating Thinkers Behind Free Trade Adam Smith David Riccardo Why Trade Specialization and division of labor Adam Smith on pin makers o 20 a day with no specialization o 4800 with specialization o Each worker is 240x more productive Specialization increases productivity and productivity increases economic growth o Increase in productivity increase in wealth Comparative Advantage Definition The idea that countries should specialize in their economic production based on the opportunity costs of producing various goods Any single country is best off specializing in that good it is comparatively best at producing and exchanging for those goods it is comparatively less setup at producing Illustration of Law of Comparative Advantage Table not shown Productivity Opportunity Cost What you give up to produce the other Law of Comparative Advantage cont Tables not shown Difference between no trade and specialization trade Law of Comparative Advantage cont Table not show Exports and Imports Division of Labor and Specialization Net Gain Comparative Advantage With comparative advantage what is one comparing Do all state have a comparative advantage to something or do only some states have Is comparative advantage the same as absolute advantage comparative advantage Is comparative advantage about producing something cheaper than others Is the goal of trade to export or import o To produce what others want and trade for what you want need What explains trade patterns Why does the USA export things like airplanes and import things like textiles Swedish economists Heckscher and Ohlin tried to explain national comparative o Characterizes states in terms of national factor endowments the material and advantage Heckscher Ohlin trade theory human resources they possess Factors of productions o Land place building o Labor workers o Capital money resources o Human Capital health care education Heckscher Ohlin Theory of International Trade 2 x 2 x 2 model o 2 states o 2 goods o 2 factors of production Relative endowments determine comparative advantage o Export goods that make intensive use of abundant factor o Import goods that make intensive use of scarce factor Determining Relative Endowments Compare capital labor ratio in one state to another state If State A has relatively more capital than State B State A is capital abundant and State B is labor abundant USA capital abundant relative to most countries What Explains Trade Patterns Industrial countries are rich in capital and skilled labor o Therefore they export goods that make intensive use of these endowments Developing countries are rich in land raw materials or unskilled labor o So they export agricultural products minerals and labor intensive products like textiles Other economic links such as shared currencies encourage trade Noneconomic factors such as diplomatic relations also influence trade patterns o Trade between hostile nations is richer than trade with friendly nations o Governments often pursue economic ties with their allies o Sanctions on Cuba someone is losing money because some firms cannot sell National trade policies are the most important non economic source of international trade there patterns These trade policies include a variety of types of protectionism What is protectionism Protectionism the use of specific measures to shield domestic producers from imports o Nearly all governments restrict at least some imports Protectionism is about redistribution Trade Restrictions are the RULE Not the exception Forms of protectionism Tariff a tax on imports levied at the border and paid by the importer Quota limits the quantity of a foreign good that can be sold domestically Nontariff barriers to trade regulations targeted at foreign goods o Health and safety standards o Environmental standards o Subsidies government gives money to domestic companies so their products are more competitive with imported goods o Currency regulation Agricultural Subsidies Norway subsidizes a very high percentage of agricultural revenue 60 70 What are the effects of protectionism Domestic producers make more money o Example Subsidies on Steel Industry or Sugar farmers Domestic consumers pay more for the product than they would have without the tariff People employed in the protected industry are insulated from competition o Insulating the industry from competition reduces the incentive for domestic suppliers to become more efficient and so heightens the risk that the industry will need long term production Protectionism also reduces the ability of society to use its resources most effectively Why Do Governments restrict trade Politics o Political Gains Pandering or Vote Buying helps a president gain or maintain office Why is trade a political issue o Trade has negative externalities Cost for actors not undertaking the action Actors don t want to lose their jobs Explaining preferences on Trade Policy Economic Interests Approach There are two leading economic theories of trade policy interests o The Stolper Samuelson approach o The Ricardo Viner specific factors approach o Vote for trade restriction or free trade based on what benefits you The Stolper Samuelson Approach Trade benefits owners of factors of production used to produce exported goods o Heckscher and Ohlin suggest that this will be the abundant factor Artificially restricting trade thus hurts
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