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Economics > INTERNATIONAL TRADE > Flashcards

INTERNATIONAL TRADE Flashcards

1
Q

FREE TRADE

A

a market environment where buyers and sellers can make transactions without government intervention

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2
Q

VOLUNTARY TRADE IS MUTUALLY BENEFICIAL x8

A

lower prices

taking advantage of resources endowments

economies of scale

increased variety/choice

acquisition of needed resources

competition can improve efficiency

political benefits

efficiency and exports = growth and development

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3
Q

KEY ECONOMISTS

A

Adam Smith–> benefits of specialization

David Ricardo–> comparative advantage theory

Frederic Bastiat–> ridicule of market restrictions

James Ingram–> magic of free trade

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4
Q

ABSOLUTE ADVANTAGE

A

the situation that occurs in comparative advantage theory

when one country can produce more of a given product

with the same or less resources

than another country

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5
Q

COMPARATIVE ADVANTAGE

A

when a country produces a good at a lower domestic opportunity cost than another country

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6
Q

COMPARATIVE ADVANTAGE

OUTPUT MODEL

A

opp cost X= output of Y/ output of X

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7
Q

COMPARATIVE ADVANTAGE

INPUT MODEL

A

opp cost of X= input of X/ input of Y

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8
Q

WHAT DOES COMPARATIVE ADVANTAGE INDICATE?

A

what a country ought to specialise in

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9
Q

SOURCES OF COMPARATIVE ADVANTAGE?

A

resource endowments

  1. relative abundance of the resource
  2. value of the good produced from the resource to the world market
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10
Q

LIMITATIONS OF COMPARATIVE ADVANTAGE

A
  1. perils of extreme specialization

2. unrealistic assumptions

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11
Q

LIMITATIONS OF COMPARATIVE ADVANTAGE

PERILS OF EXTREME SPECIALIZATION

A

relative prosperity of a country dependent on the value of the good

if the good is a commodity, the country’s entire income is bound to the price of the commodity

= risk to the population’s well being + volatility

long term concern: will the country be trapped in a certain type of production= limiting its potential for full development

comp ad in agricultural goods…
the kind of structural change necessary for developing might never happen

no dev of industry or service sector

= low standards of living and relative dependency

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12
Q

LIMITATIONS OF COMPARATIVE ADVANTAGE

UNREALISTIC ASSUMPTIONS

A
  1. transport costs are irrelevant to the theory
  2. goods are assumed to be identical
  3. perfect information about the availability and prices of all available goods is impossible
  4. the two- country model is unrealistic
  5. full employment: a necessary condition of the theory, rarely occurs in practice
  6. the assumption that countries practice free trade is highly debatable
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13
Q

LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
the assumption that countries practice free trade is highly debatable

A
  • -> many countries still protect their markets

- -> with tariffs, quotas, subsidies and bureaucratic barriers

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14
Q

LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
full employment: a necessary condition of the theory, rarely occurs in practice

A

–>dev countries have massive unE and inefficiency

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15
Q

LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
the two- country model is unrealistic

A
  • -> making the determination of comparative advantage rather difficult
  • ->however multi-country analysis is possible with appropriate mathematical modeling
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16
Q

LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
perfect information about the availability and prices of all available goods is impossible

A
  • ->given the vast nature of the global markets

- -> determining one’s one comp ad is v difficult

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17
Q

LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
goods are assumed to be identical

A
  • -> goods have some differentiation
  • -> esp. in the world of manufactured goods
  • -> difficult to assess true comp ad when the goods are not the same
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18
Q

LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
transport costs are irrelevant to the theory

A
  • ->but cannot be ignored in practice

- -> they can raise costs enough to eliminate a comparative advantage

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19
Q

WTO

A

only international organization dealing with global rules of trade between nations

its main function is to ensure that trade flows as smoothly, predictably and freely as possible

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20
Q

AIMS OF THE WTO x5

A
  1. trade w/o discrimination
  2. freer trade through negotiation
  3. predictability through binding and transparency
  4. promoting fair competition
  5. encouraging development
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21
Q

FUNCTION OF WTO

A
  1. provide forum for trade negotiation
  2. execute WTO agreements
  3. evaluate and rule on trade complaints by member countries
  4. provide technical assistance to dev countries on trade issues
  5. track changes in member trade policies
22
Q

AIMS OF THE WTO

1. trade w/o discrimination

A

all subscribed to “most favoured nation status”
= goods from all WTO member countries are treated equally

a tariff applied to one is a tariff applied to all

no real favourites

foreign goods treated as the same as domestic goods

23
Q

AIMS OF THE WTO

2. freer trade through negotiation

A

changes of trade policy are done by direct gradual dealing

affected countries have time to prepare for adjustments

24
Q

AIMS OF THE WTO

3. predictability through binding and transparency

A

binding= the commitment among members to keep tariffs at or below certain rates

allows importers to assess markets more accurately and make better decisions about trade

openness about trade rules encourages more trade

25
Q

AIMS OF THE WTO

4. promoting fair competition

A

rules against dumping and intellectual property theft are aimed at increasing fair competition

generally the creation of a system of trade rules promotes fair play by establishing some fundamental guidelines for most trade

26
Q

AIMS OF THE WTO

5. encouraging development

A

nearly 2/3 of members are dev countries

these countries are granted special trade concessions because it is assumed that their industries need time and space to grow to a level of direct global competition

27
Q

SUPPORTERS’ VIEW OF THE WTO

A
  1. promotes peace
  2. place to handle disputes
  3. based on rules rather than power
  4. cuts the cost of living
  5. greater consumer and variety
  6. trade boosts income
  7. trade increases economic growth
  8. WTO system encourages efficiency/simplicity
  9. shield country from narrow interests
  10. same rules create good incentives for better government
28
Q

SUPPORTERS’ VIEW OF THE WTO

1. promotes peace

A

by increasing trade relationships between countries

WTO help reduce conflict ‘sales people rarely fight their customers’

1930s Europe competed to raise barriers, which contributed to WW1

post WW1 Europe has grown increasingly integrated by trade and its peace

29
Q

SUPPORTERS’ VIEW OF THE WTO

2. place to handle disputes

A

providing a dispute process with a schedule of negotiation as part of the early stages

WTO encourages compromise

30
Q

SUPPORTERS’ VIEW OF THE WTO

3. based on rules rather than power

A

WTO often judges rich countries to be violators of trade policy

rule based system helps protect smaller, poorer trade partners

31
Q

SUPPORTERS’ VIEW OF THE WTO

4. cuts the cost of living

A

when countries produce based on efficiencies and comparative advantage

the cost of food, clothes and other necessities are cheaper

WTO notes that rich countries primarily the EU and the US sub their farmers with 1 billion dollars a day

32
Q

SUPPORTERS’ VIEW OF THE WTO

5. greater consumer and variety

A

trade gives consumers worldwide access to goods

meaning any consumer can shop according to their preferences

more luxury goods are available

as well as a variety of cheaper consumer goods

33
Q

SUPPORTERS’ VIEW OF THE WTO

6. trade boosts income

A

1929 uruguay round increased Y from $109-510 billion

income can be used by gov

to improve services and infrastructure

however producers protest when inefficient industries face competition

34
Q

SUPPORTERS’ VIEW OF THE WTO

7. trade increases economic growth

A

increase in employment depends on the countries transitional policies

35
Q

SUPPORTERS’ VIEW OF THE WTO

8. WTO system encourages efficiency/simplicity

A

certainty about trade rules

transparency about the rules

and predictability about the trading environment

all encourage trade and efficiency

36
Q

SUPPORTERS’ VIEW OF THE WTO

9. shield country from narrow interests

A

when asked to enact forms of protectionism

national gov resist as they want to be seen as playing by international rules

govs are better off to ignore special interest groups

37
Q

SUPPORTERS’ VIEW OF THE WTO

10. same rules create good incentives for better government

A

short term

special interest lobbying and corruption

are more difficult to enact when everyone knows the rules (transparency)

and the gov is pledged to support them

38
Q

CRITICS’ VIEW OF THE WTO x9

A
  1. favour rich countries
  2. trade between rich countries
  3. poor countries can’t afford trade representatives
  4. rich countries get richer faster
  5. uruguay round has not addressed tariff escalation
  6. agricultural subsides in rich countries have not been reduced
  7. the protection of intellectual property rights
  8. bureaucratic barriers
  9. commercial interests in mind
39
Q

CRITICS’ VIEW OF THE WTO

1. favour rich countries

A

despite the claims to equalize trade environment

these countries bring large groups of trade negotiators, far more than smaller countries

many agreements are made w/o consultation of smaller countries

G20 formed by Brazil and India to rep dev countries

40
Q

CRITICS’ VIEW OF THE WTO

2. trade between rich countries

A

negating the claim that trade benefits everyone

41
Q

CRITICS’ VIEW OF THE WTO

3. poor countries can’t afford trade representatives

A

no representation in trade negotiations

42
Q

CRITICS’ VIEW OF THE WTO

4. rich countries get richer faster

A

oxfam international ‘with only 14% of the world’s population, high income countries account for 75% of global GDP’ which is approximately the same share as in 1990’

43
Q

CRITICS’ VIEW OF THE WTO

5. uruguay round has not addressed tariff escalation

A

developed countries have kept tariffs on raw materials and primary goods imported

while maintaining much higher tariffs on the semi-processed and higher value goods made from the raw materials

= keeps low cost competition from LDCs in the semi-processed and higher value industries

prevents LDCs from diversifying their production

increasing the risk of overspecialization

44
Q

CRITICS’ VIEW OF THE WTO

6. agricultural subsides in rich countries have not been reduced

A

despite pledges by countries signing up to the uruguay round

these subs depress world prices and reduce production in developing markets that would otherwise export to the developed world

45
Q

CRITICS’ VIEW OF THE WTO

7. the protection of intellectual property rights

A

keeps innovation form spreading quickly to dev countries

46
Q

CRITICS’ VIEW OF THE WTO

8. bureaucratic barriers

A

as tariffs are dropped by successive rounds of trade agreements

rich countries appear to be resorting to bureaucratic barriers

e.g. product standards to keep goods out

47
Q

CRITICS’ VIEW OF THE WTO

9. commercial interests in mind

A

WTO agreements ignore cases of worker exploitation, rights and issues

WTO does little to encourage environmental protection

the promotion of trade empowers MNCs to campaign for relaxed environmental protection and worker standards

48
Q

RICHER ECONOMIES THAT ARE OPEN TO TRADE GROW FASTER..

A

poor countries grow richer when more open to trade, as recent successes in India and China have helped to demonstrate

49
Q

RICH COUNTRIES ARE MORE PROTECTIONIST THAN POOR ONES..

A

not true, since poor countries tend to have higher av tariffs than rich ones

50
Q

AGRICULTURAL PROTECTIONISM IN THE RICH WORLD WORSENS GLOBAL POVERTY…

A

if subs were removed, food prices will rise

these increases could hurt nutrition levels in some poor countries that rely on food imports

Economics (12 decks)

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