INR2002 Exam 3 Study Guide Mercantilism Idea that extensive state regulation is in the economy s best interest the state should protect its own economic interests at the expense of others Liberalism Market ensures pursuit of self interest helps the public good states don t care what others gain as long as they gain something too most important goal is maximizing wealth while minimizing waste International trade today is largely free but trade policies differ between industries barriers to trade hurt economic growth overall and free trade creates winners and losers international institutions help make cooperation on trade policy possible Comparative Advantage States are better at making certain goods than other goods states specialize in the goods they can make efficiently and they trade for the goods they cannot every country has a comparative advantage in something but not necessarily an absolute advantage to produce and export a product Free trade allows a country to pursue its comparative advantage importing goods they cannot make well allows a country to focus on more efficient industries restricting trade protectionism is costly to consumers Hecksher Ohlin Theory of Comparative Advantage basic factors of production include land unskilled labor capital investment human capital skilled labor all countries have these components some countries are endowed with capital but not labor Luxembourg others are endowed with labor but not capital China Pakistan production of goods uses different factors in different amounts and countries have comparative advantages in goods that use their most abundant factor of production Patterns of Trade countries specialize in and export goods that use they abundant factors of production U S imports labor intensive goods while exporting capital intensive goods import goods that use their scarce factors of production industrial countries are rich in capital and skilled labor and export planes software and automobiles developing countries are rich in land raw materials or unskilled labor and export raw goods natural resources or clothing Explaining trade patterns economic links like shared currencies also encourage trade noneconomic factors like diplomatic relations as well Trade restrictions are the rule not the exception Protectionism the use of specific measures to shield domestic producers from imports Trade barriers impediments to the import of foreign goods Tariffs taxes on imports paid for by the buyer or importer make foreign goods more expensive than domestic goods Non Tariff Barriers to trade Quotas limits set on imports limit supply of a good entering a country in order to encourage domestic product purchases while increasing prices of foreign goods imposing subsidies tax breaks or price guarantees to increase the price of foreign goods restrictions and regulations make imports more difficult to buy and put in front of consumers economic nationalism promoting Made in America products hoping to stimulate the national economy Governments restricting trade Infant Industries non competitive industries protected and given advantages to eventually make it in the competitive world economy shift in market conditions products made more expensive so other industries are affected Protection necessary for national security in some cases as the supply of a product should not be risked by deteriorating relations with a trading partner protectionism can be a response to other states protectionism as a precautionary measure Trade can have drawbacks with benefits and costs not evenly distributed within a state concentrated industries more likely to complain than larger consumer groups about restrictions to trade trade barriers often reflect domestic concerns assist national producers even as they cost consumers more consumers pay costs of protection Winners and loser of trade abundant factors of production gain from freer trade reinforcing concept of specialization freer trade leads to contraction of the scare factor intensive industry protection benefits the scare factor of production winners are mostly capital and human capital in the U S while losers are unskilled labor real wages are stagnant while national income per person continues to rise today income inequality rising Trade depresses wages of low skilled workers other causes include tax policy weaker labor unions increased use of technology states may restrict trade if certain groups are politically powerful Comparative advantage all countries benefit from lowering trade barriers but some might cheat and raise them with an incentive to do so no way to beat rational incentive to cheat with trade and need rules in place General Agreement on Tariffs and Trade GATT Formed to control trade and was eventually replaced by the World Trade Organization WTO to get barriers to trade eliminated WTO gives members most favored nation status MFN where lowest barriers to trade are given to countries as a benefit without complete elimination of barriers all members have an equal vote but negotiations are dominated by largest trading states countries can sue each other for unfair trade policies and enforce riling through retaliation has been successful in getting countries to lower their trade barriers Regional Trade Agreements North American Free Trade Agreement NAFTA and the European Union strongest trade agreement in the world with no tariffs between members Bilateral agreements between two countries only more restrictions placed on trade in these cases Resistance to trade arguing protesting against free trade and wages too low for workers environmental practices may harm certain animals or environments spark movements like the Fair Trade movement that claims to pay their workers a fair wage certified by an NGO Trillions of dollars loaned across international borders every year U S is 12 trillion dollars in debt to other countries as of Dec 2013 47 of debt is held by foreign investors Trade in goods and factor flows across borders are near perfect substitutes comparative advantage says countries should permit free flows of capital or labor into or out of its economy Portfolio investment loans and bonds provide income to the lender while there is no control over assets of the borrower most investment is this type Foreign Direct Investment FDI investor acquires real assets facilities in a foreign country Concessional finance money lent at below market rates Investors invest to earn higher rates of return on their
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