8 - Trade Flashcards
2 main causes of globalization:
- Technological progress has reduced transport costs
- Trade policies
3 measures of trade openness:
- The quantity of exports + imports as a share of GDP
- Regulations and policies
- Law of one price
Sachs and Warner’s openness index:
Classified as open if non of the following is met:
- Average tariffs rate>40%
- Non-tariff barriers cover 40% or more of trade
- Black market exchange rate differ from official with more than 20%
- State monopoly on major exports
- Centrally planned socialist economy
Gains from trade according to the models:
- Lower relative price for the imports
- Higher relative price for the exports
- -> Specialization and further gains!! Higher utility.
Redistributive implications from trade:
Some lose, some win but net gain should always be positive. This redistribution explains why protectionism is common.
Stolper-Samuelson theorem:
Trade will equalize factor prices since the prices of the good will adjust to the trade - export goods increase and price of imported decrease and hence payments to the factors of production will also change in the same way.
–> AND since you will export what you have in abundance, it is these factor prices that increase.
Does Stolper Samuelson’s theory imply convergence?
BOTH, inequalities should increase since rich countries have relatively moor skilled labor and they will increase their wages under trade, will the unskilled will decrease. However, in the poor country, it will be the reverse.
Historically, what have increased trade?
Lower transport costs due to tech change (ex air-freight, steamships etc.
Trade effect on poverty?
Mixed results, depend on context.
- If comparative advantage in unskilled labor sector, then it can reduce poverty.
- If natural resources, not help reducing poverty since it’s not labor intensive.
- Improved tech would gain semi-skilled.
Etc.
Three industrialization strategies:
used for latercomers that have disadvantage as all the other rich countries have reached economies of scale
- ISI - Import Substitution Industrialization
- EOI - Export Oriented industrialization
- OEI - Open-economy Industrialization
(Need protection of industry so that they can learn and reach sufficient scale to be competitive on the world market, infant industry argument).
Describe ISI and its + and -
Use import tariffs or quotas to raise domestic price to the level of the average cost in the infant industry - when output increase, avg cost should fall and then tariffs can be reduced.
+ revenue for government
- requires a large domestic market
- lobbyists will try to keep the tariffs, hard to reduce them (credible commitment by government hard)
Describe EOI and its + and -
Identify firms/sectors that have potential to be competitive internationally and subsidize them until they are comp.
+ work even without large domestic markets
- costly for government
- firms must immediately be competitive
- risk of corruption/rent seeking as the firms will try to maintain the subsidies
- the picking winner phase could also be corruptive
Describe OEI and its + and -
Create good investment climate to attract FDI, together with low labor costs, foreign firms can establish and bring their tech.
+ does not require a phase of learning and reaching scale
+ foreign firms come with skills directly
- hard to create good investment climate (requires a lot of diff policies)
Ps. must create linkages to the locals and domestic market for long-term effects.
What is a good investment climate?
Ex:
- political and macroeconomic stability
- infrastructure
- rule of law and property rights
- some semi-skilled labor
- openness
