INR EXAM 2 STUDY GUIDE INTERNATIONAL TRADE What is international trade and why do states engage in it What do they trade and with whom What are the benefits and costs of trade and who is helped and hurt by it What are the main international organizations that cover trade and how do they work I What is trade the action of buying and selling goods and services II The gains from trade A B Specialization the division of labor doing what you do best Absolute advantage ability of a country or a firm to produce more of a particular good or service than other countries or firms using the same amount of effort and resources Comparative advantage i ii iii Core concept of the economics of trade Applies the principle of specialization to countries The conclusion that each country will be best off it produces what it is best at producing and exchanges its products with other countries in return for imports of things it is not so good at producing D Leads to increased competition which lowers prices improves quality increases variety III What do you trade Heckscher Ohlin trade theory a country will export goods that make intensive use of the factors of productions that it has an abundance of Ex Country with fertile land will export lots of produce Factors of production i ii iii Exports goods that intensively use abundant factors Import goods that intensively use scarce factor Other explanations for trade patterns Land self explanatory Labor unskilled vs skilled also self explanatory Capital both and the machinery and equipment needed to produce goods C A B C D E National trade policies address the interests of domestic constituencies i ii While trade takes place among countries it really involves individuals and firms with well defined interests partners with opposite factor endowments Ex I have lots of forests but no farm land you have lots of farm land but no forests I trade you lumber for produce common currency don t have to worry about exchange rates IV Who do you trade with A B Geographic reasons transport costs are less Economic reasons i ii i ii i ii C Cultural reasons D Political reasons Shared language Shared history background etc Trade with allies a Cement alliances b Help friendly nations Avoid trade with hostile countries a Could be strengthening potential enemy b Business don t like agreements may very well be disrupted by the outbreak of hostilities V If trade is so good why do we restrict it A Types of protectionism imposition of barriers to restrict imports i Tariffs tax imposed on imports raises domestic price of imports to protect domestic producers from foreign competition encourages consumption of domestically produced goods most common Quotas limits quantity of a foreign good that can be sold domestically makes imported good more expensive to domestic consumers common Regulations and other nontariff barriers NTBs quotas regulations that favor domestic products etc common ii iii B History of protectionism colonies i Mercantilism great powers used their military might to control trade with ii Middle of 1800s Great Britain and other leading industrial countries moved in the direction of trade liberalization fewer restrictions on trade 1860s 1914 international trade among principal industrialized nations was quite free except for protectionist United States iii iv WWI in 1914 international trade relations entered 30 years of crisis and closure major powers divided the world into more or less hostile trading blocks After 1945 Western World under American leadership reduced trade barriers among developed nations Communist countries and developing nations protected themselves from world markets Since 1990s international trade has once more been quite open vi v C While trade provides overall benefits those who face more competition may be hurt D Are all limits on trade protectionism VI Who is helped and hurt by trade A B Consumers benefit Stolper Samuelson Theorem Mobile factors i Protection benefits scarce factor of production hurts abundant factor of production a Ex In a labor rich country protection will harm labor In a labor scarce country protection will benefit labor ii Trade politics should divide along factor class lines a Owners of scarce factors of production are protectionist b Owners of abundant FOP favor free trade c In rich societies capitalists and skilled workers should be free traders while unskilled workers should be protectionist In poor societies workers should support trade while capitalists should be protectionist Due to abundant unskilled labor and scarce capital d C Ricardo Viner Theorem Specific factors based on the principle that factors of production are not vey mobile it is difficult for labor or capital to move from use to use Ex Capital in the steel industry largely takes form as steel factories it cannot simply be transformed into capital in the food industry D Protection benefits all those associated with import competing industries Protection hurts all those associated with exporting industries Trade politics should divide along industry lines i ii iii Collective action problem as an answer for why there is protection i Major beneficiary of trade are consumers a dispersed group ii Major beneficiary of protection are protected industries a more concentrated iii group Protectionists more likely to overcome collective action problem and have disproportionate influence on policy E Domestic institutions and trade i Democracies vs dictatorships a Democracies less protectionist b Dictatorships protectionist trade restrictive ii Intra democratic differences a Partisan electoral and legislative institutions differences b Ex European countries have strong class based parties the working class votes for the socialist parties c Politicians with local political constituencies tend to be more responsive to local interests d Country 1 has strong national parties and a powerful national executive and Country 2 has weak national parties and a weak national executive e Politicians from Country 1 are more likely to focus on national effects of policy and favor free trade f Politicians from Country 2 are more likely to focus on local concerns and favor trade protection to local special interests Leftist governments should support free trade in poor countries and protection in rich countries Rightist governments should support free trade in rich countries and protection in poor countries g a Many observers believe that trade has led to reduced wages for unskilled
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