POL 202 Int. Relations Lecture 16 Outline of Last Lecture I. Midterm Study GuideOutline of Current Lecture I. international Political Economya. International Tradei. The central Puzzle about Int. Trade1. Prohibited2. Largely free3. Intersection of domestic policies4. Facilitate5. Container shipsii. Core to the analysis1. Barriers2. Trade liberalization3. Int. institutionsiii. What’s so good about trade?1. Actors engage2. Specialization3. Core conceptsa. Absolute advantagei. Definitionb. Free tradei. Definitionc. Economic logiciv. Comparative advantage and the political economy of trade1. Comparative advantage2. Absolute advantagea. Opportunity costb. What’s so good about trade?i. Oliver Wendell Holmesii. Babe Ruthc. Comparative Advantage and the Political Economy of Tradei. All countries have a comparative advantage in somethingii. Examplesd. Distributional Effect of Trade1. Consider A country in a state of autarky; there is no international tradea. Prices determined by domestic supply2. Two areas of special interesta. Consumer surplusb. Producer surplus3. International tradeii. Implicationsiii. Tariffs 1. Quantity demanded falls2. Consumer surplus falls3. Producer increasesiv. Two new regions of intereste. What explains trade patterns?i. Heckscher and Ohlinf. Basic factors of productiona. Landb. Laborc. Capitald. Human capitalg. Specializationh. Noneconomic factors such as diplomatic relations also influence trade patternsi. Trade between hostile nationsii. Governments often pursue alliesi. Trade policies importantj. Consumers of farmers and BankersCurrent LectureI. International Political Economya. International Tradei. The Central Puzzle about international trade1. Why do some countries hardly restrict trade while others come close to prohibiting it?2. Today, international trade is largely freea. However trade policies often differ between industries3. Trade stands at the intersection of international and domestic politicsa. Foreign trade impacts domestic producers and consumers4. Both domestic and international institutions shape trade policies5. To facilitate trade bargaining a network of global and regional institutions has evolved6. Guaymas now accepts standard container shipsa. Significant impact in Arizonaii. Core to the Analysis1. Barriers to trade hurt economic growth overall2. But the trade liberalization creates winners and losers- thus, opponents and proponents3. International institutions can help make cooperation on trade policy possibleiii. What’s so good about trade?1. Actors engage in foreign trade to realize the benefits of specializationa. Division of labor allows society to focus on different economic activities2. Specialization increases productivitya. However it requires access to large markets3. The core concept of the economics of trade is comparative advantagea. A nations gains by specializing in producing and exporting what it produces most efficientlyb. Absolute advantage: the ability to do something better than othersc. Free trade allows a country to follow its comparative advantagei. Importing good that we cannot make very well allows usto focus on more efficient industriesd. Economic logic suggest that imports represent gains from tradei. Protection is costly to consumersiv. Comparative advantage and the political economy of trade1. Absolute advantagea. Producing a good more efficiently than any other country2. Comparative advantagea. Producing a good at a lower opportunity cost than other countryb. Opportunity costi. What a country forgoes in order to produce a particular goodv. What’s so good about trade?1. Comparative vs absolute advantagea. Oliver Wendell Holmesb. Babe Ruthvi. Comparative Advantage and the Political Economy of Trade1. All countries have a comparative advantage in somethinga. Comparative advantage implies that all countries benefit from trade by specializingb. Countries should focus on the goods they can produce most efficientlyc. Assume two countries, Portugal and England can produce cloth or winei. Assume they only factor of production is labor we thus measure production cost in work hoursii. England takes 15 hours to produce a bolt of cloth and 30work hours to produce a barrel of wineiii. Portugal takes 10 work hours for cloth, and 15 work hours for a barrel of wined. Opportunity costs:i. England must forgo 2 bolts of cloth to make a barrel of wineii. Portugal must forgo 1 ½ bolts loth of cloth to produce a barrel of wine or it can give up 2/3 of a barrel of wine toproduce a bolt of clothe. The opportunity cost of producing cloth is lower in England and the opportunity cost of producing wine in Portugali. What if the two countries specialize and then tradef. International trade increase aggregate welfare; there will be more cloth and wine to go aroundvii. Distributional Effect of Trade1. Consider A country in a state of autarky; there is no international tradea. Prices are determined by the intersection of domestic supply and domestic demandb. The supply line is upward-sloping and the demand line is downward sloping2. Two areas of special interesta. Consumer surplusi. At least some consumers would purchase good at higherpricesii. Surplus is what consumers as a whole save from a lowerpriceb. Producer surplusi. At least some producers would produce good at a lower priceii. Surplus is what producers as a whole gain by higher prices3. Now introduce international tradea. The world price is determined by the intersection of global not domestic supply and demandb. World price is usually lower than domestic price4. After the country moves from autarky to international trade, the domestic price declines to the lower world pricea. Quantity demanded at lower price, Qd now much larger than quantity supplied domestically, Qsb. The consumer surplus thus increase considerably5. After the country moves from autarky to international trade the domestic price declines to the lower world price6. Implicationsa. Opening trade redistributes income from producers to consumersb. Opening trade makes society as a whole better off7. A tariff increase domestic price of good a. Quantity demanded fallsb. Consumer surplus fallsc. But producer surplus increases8. Two new regions of interestsa. Surplus to governmentb. Deadweight lossc. Represents efficiency losses to society from protectionismviii. What explains Trade Patterns?1. Swedish economists Heckscher and Ohlin tried to explain national comparative advantage2. Heckscher-Ohlin trade theorya.