CH 7 International Trade VOCABULARY COMPARATIVE ADVANTAGE the ability of a country or firm to produce a particular good or service more efficiently than other goods or services such that its resources are most efficiently employed in this activity ABSOLUTE ADVANTAGE 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 HECKSCHER OHLIN TRADE THEORY the theory that a country will export goods that makes intensive use of the factors of production Thus a labor rich country will export goods that make intensive use of labor PROTECTIONISM the imposition of barriers to restrict imports Commonly used protectionist devices include tariffs quantitative restrictions quotas and other nontariff barriers TRADE BARRIERS any government limitation on the international exchange of goods TARIFFS a tax imposed on imports this raises the domestic price of imported good and may be applied for the purpose of protecting domestic producers from foreign competition QUOTA quantitative limit placed on the import of particular goods Nontariff barriers to trade obstacles to imports other than tariffs STOPLER SAMUELSON THEOREM the theory that protection benefits the scarce factor of production So in a labor scarce country labor benefits from protection and loses from trade liberalization RECIPROCITY in international trade relations a mutual agreement to lower tariffs and other barriers to trade MOST FAVORED NATION STATUS a status established by most modern trade agreements guaranteeing that the signatories will extend to each other any favorable trading terms offered in agreements with third parties WORLD TRADE ORGANIZATION an institution created in 1995 to succeed the GATT and to govern international relations GENERAL AGREEMENT ON TARIFFS AND TRADE an institution created in 1947 in which member countries committed to reduce barriers to trade and to provide similar trading conditions to all other members The GATT was replace by the World Trade Organization I Trade is Mutually Beneficial Voluntary exchange o Producers business o Consumers New markets and increased efficiency o Cheaper products usually outside the country Specialization and division of labor Comparative advantage o Adam smith invented it after pointing that an individual pin maker working alone could make at best 20 a day However when divided into about 18 steps with each worker specializing in one or two steps they could produce 48000 pins a day o More products made cheaper more job opportunities o David Recardo used this idea of specialization and applied it to international trade comparative advantage o Comparative advantage is the idea that countries should specialize in their economic production based on the opposition costs of various goods AKA if your a certain country produce your best good don t try and produce something you will fail at Nations gain most by specializing in producing and exporting what it produces most efficiently You export because you import what you want o It is not necessary for a country to have absolute advantage the ability to do something better than others all that is necessary is comparative advantage o The goal of trade is to import II Explaining Trade Patterns Heckscher Ohlin Model o Four different factors of production Land essential input to agricultural production Labor referred to undifferentiated unskilled labor Capital Machinery equipment with which goods are produced Financial assets necessary to employ equipment Human capital skilled labor training education o If you don t have a lot of something you want to import the things you have in excess you export o High in labor high export in rich labor products o Industrial countries are rich in capital and skilled labor Example US They export goods that make intensive use of these o Developing countries are rich in land raw materials and endowments unskilled labor Example China Export agriculture products minerals and labor intensive products like textiles Any policies that hinder trade hurt welfare and productivity o But ALL countries restrict III Why Do Countries Restrict Trade Protectionism the use of specific measures to shield domestic producers from imports trade barriers o Trade restrictions are the RULE not the exception Every country does this Trade barriers redistribute income from consumers and foreign producers to domestic producers redistributive effect o Consumer loses o Even though consumers are majority we come to Collective Action Problem so coordinating together to want free trade is very difficult Type of trade restrictions o Tariffs tax Most common o Quotas limits the quantity that can be sold o Nontariff Barriers o Subsidies o Prohibitions More reasons why countries restrict trade o Domestic producers make more money Ex steel industry or sugar farmers IV Explaining Trade Restrictions Stolper Samuelson Approach o Domestic consumers pay more for the product than they would have without the tariff Insulating the industry from competition reduced the incentive for domestic suppliers to become more efficient and so heightens the risk that the industry will need long term production o Trade benefits owners of factors of production laborers investors and farmers used to produce exported goods aka abundant factor o Artificially restricting trade thus hurts owners of abundant Lose money because with free trade they can sell all factors they want o The US has lots of capital industry but scarce unskilled labor The unskilled worker is likely to favor protectionism The consumer is likely to favor free trade and owners of capital in rich countries Ricardo Viner Approach Owners of capital in poor countries do not support free trade Workers in poor countries support protection o High scarce factors high protection Ex unskilled labor wants protection in the US o Asks why whole INDUSTRIES often act together The answer some factors of production are specific to particular industries o In this model a worker s interest flow from her sector of the economy rather than the factor she owns o What type of domestic conflict are we likely to observe with full factor mobility Class based conflict Low protectionism o What types of domestic conflicts are we likely observe with non mobility Industry sectorial based conflict High protectionism Collective action in Free Trade o High factor mobility low protectionism high class based o Low factor mobility high
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