Classical Ideas about International Trade (KEMENY) Flashcards
What we mean when we say ‘protection’?
• Countries erect barriers to trade
– making it more costly to consume foreign stuff
– making it less costly to consume local stuff
• Often couched in a language of protecting
local producers from ‘unfair’ competition
– Where unfair usually means cheaper
Tariffs:
A tax or duty to be paid on a particular class of imports or exports.
Age of Mercantilism…–the age of strong nation-states (Britain; Holland; Portugal; Spain) in conflict
16th -18th century Western Europe
Mercantilism goal
The goal is to capture gold because by having more gold = more successful
…by exporting more than importing
Result of mercantilism
Lots of protectionism and lots of war.
Adam Smith and Absolute Advantage
Argues
• trade is better than protection, under certain
conditions
• Unrestricted trade=broader stimulus (not just to rich merchants)
• economies are differently productive at different activities
Smith argues against mercantilist views
Exports are not important by themselves
• But can bring in revenue that could be used to buy things (incl imports)
– Trade is a positive sum activity (under some conditions)
– Acquiring bullion can be self-defeating: leads to expansion of money supply and domestic inflation
Doctrine of absolute advantage:
“If a foreign country can supply us with a
commodity cheaper than we ourselves can
make it, better buy it of them with some part of
the produce of our own industry, employed in
a way in which we have some
advantage.”
(Smith, 1776)
Absolute Advantage
Economies are differently productive at different
activities
David Ricardo and Comparative Advantage
Trade should occur even if one of the economies has an
absolute advantage over the other country in BOTH goods.
Comparative Advantage
CA: the opportunity cost of producing a good in one economy is lower than the tradeoff in other countries
Assumptions with Comparative Advantage
• No transport or other trade costs
• Constant returns to scale (costs do not vary
with the size of output)
• Goods are homogenous (no quality/brands)
• Tastes are identical
• Perfect competition (all are price-takers)
• Labor is immobile between countries but
perfectly mobile across industries
• Perfect knowledge among producers
The Heckscher–Ohlin theorem
It states that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively.
Difference between specific tax and ad valorem tax
A specific tax is a set amount of tax per unit sold, such as a 10p tax on packets of cigarettes.
In contrast, an ad valorem tax is a percentage tax based on the value added by the producer.
Non-tariff barriers: Quotas
A limit on the value of imports or exports
