INR2002 NOTES EXAM 2 CHAPTER SEVEN INTERNATIONAL TRADE What s So Good About Trade Why Do Countries Trade What They Do Actors engage in foreign trade for the same reason that they trade with each other within countries to realizes the benefit of specialization Specialization increased productivity and productivity fueled economic growth The classical economists emphasized the specialization required access to large markets They argued that restricting market size slowed economic growth The comparative advantage is the core concept of the economic of trade The ability of a country or firm to produce a particular good or service more efficiently than other goods and services such that it s resources are most efficiently employed in this activity The comparison is to the efficiently of the other economic activities the actor might undertake not to the efficiency of other countries The word comparative refers to a comparison among the things a country can do Countries should produce what they produce most cost effectively The principle clearly implies for free trade The absolute advantage is the ability of a country or firm to produce more of a particular good or service than other countries or firms using the same amount of effort and resources Economic logic insist the opposite that imports are the gains from trade while exports are it cost Heckscher Ohlin trade theory is the theory that a country will export goods that make intensive use of the factors of production in which it is well endowed Thus a labor rich country will export goods that make intensive use of labor Factor Of Production include Land an essential input into agricultural production Labor typically understood to refer to undifferentiated and unskilled labor Capital for investment which refers both to machinery and equipment with which good are produced and to the financial assets necessary to employ this machinery and equipment Human capital which refers to skilled labor so called because the labor has been enhance by investment in training and education The factors of production can be association with different socioeconomic actors For example a country abundant in land will also typically have man farmers Non economic factors also affect trade There are two reasons for this Trade between hostile nations is riskier than trade between friendly nations businesses avoid engaging in trade that ma very well be disrupted by the outbreak of hostilities Government often pursue close economic ties with their allies in order to cement the alliance and help friendly nations Trade Restrictions Are The Rule Not The Exception Every country currently has at least some restrictions on trade with the rest of the world Protectionism is the imposition of barriers to retrict imports Commonly used protectionist devices are tariffs a tax imposed on imports which raise the domestic price of the imported good and may apply to the purpose of protecting domestic producers from foreign competition quantitative restrictions quotas quantitative limit placed on the import of goods nontariff barriers obstacles to import other than tariffs Trade Barriers any government limitations on the international exchange of goods The most direct cost of protection is to consumers of the protected good Tariff and quotas raise the domestic price of imported goods and may lead to prices increases for similar domestically produced goods Winners and Losers In International Trade There are three groups of actors that stand to lose from trade protection Consumers of the imported good which includes consuming industries which may be powerful and well organized them A second group that tends to oppose protection is exporters They worry that their country s protective barriers might provoke retaliation in foreign markets Citizens in general may be willing and able to punish politicians for the costs that protect imposes on The first theory grows out the HO approach If a country exports goods that make intensive use of production that the country has in abundance then trade is particularly good for those who own that factor of production Stopler Samuelson Theorem the theory that protection benefits the scarce factor of production This view flows from the Heckscher Ohlin approach Production benefits scarce factor of production hurt abundant factor of production Trade politcs should divide along factor lines Ricardo Viner specific factors model a model of trade relations that emphasizes the sector in which factors of production are employes rather than the nature of the factor itself The differentiates it from the HO approach for which the nature of the factor labor land capital is the principal consideration Production benefits all those associated with import competing industries Production hurts all those associated with exporting industries Trade politics should divide along industry lines The Organization of Interest trade protection affect large groups both positively and negatively This raises the possibility of free riding Both supporters and opponents of trade protection face problems of collective action The Representation of Interest through Political Institutions just as narrowly based social groups are more likely to favor protection than broader ones so political institutions that are more closely tied to narrow interests are more likely to favor trade protection than institutions that reflect broader interest This is an example of the sort of bias that political institution can create or intensify Collection action problem as an answer for why there is protection Major beneficiary of trade are consumers a dispersed group Major benificiary of protection are protected industries a more concentrated group Protectionist more likely to overcome collective action problem and have disproportional Overcoming Problems of Strategic Interaction There are things that affect international trade relations which are Small Numbers easier for government to monitor each others behavior there is likely to e less free riding among small groups of countries than in the world at large Theory of Hegemonic Stability argues that the existence of a single very powerful nation facilitates the soln of problems for the world as a whole Information Repeated Interaction makes it less likely to cheat Main International Institution Reciprocity Most Favored Nation MFN Status GATT in international trade relations a mutual agreement to lower tariffs and other barriers to in
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