L28 - International Trade and Commercial Policy Flashcards
What is a country that does not participate in trade called?
Autarky
What is International Trade necessary for?
- Necessary to achieve the gains that international specialisation makes possible
- Trade allows each individual,region or nation to concentrate on producing those goods and services that it produces relatively efficiently while trading to obtain goods and services that it would produce less efficiently than is done by others
Where are the sources of gains from trade?
Results from comparative advantage
What is Comparative Advantage?
A country should specialise in the goods or services it can produce at the lowest opportunity cost and trade with another country
-RICARDO’S THEORY
What is Absolute Advantage?
When a country can produce greater units of a good using fewer factors of production than another nation.
Total production can be increased if each country specialises in producing the product for which it has an absolute advantage.
-SMITH’S THEORY
What are the 3 main sources of gains from trade?
- Differing levels of resources
- 2nd Source is from reduction in costs of production that occur via specialisation
- International Competition usually brings about rapid technological growth and economic growth (more than if closed off)
What can be implied of the gains from trade with constant opportunity costs?
Initial lines represent the amount of production for wheat and cloth (between US and EU)
Without trade in the economies. These initial lines represents Consumption possibilities
Point D represent the Consumption possibilities with the introduction of trade between the two countries.
(SEE DIAGRAM ON NOTES)
What is the conclusion we draw from the gains from trade arising from international difference in opportunity cost?
1- Country A has a comparative advantage of country B in producing a product when the opportunity cost (in terms of some other product) of production in country A is lower. However, this implies that it has a comparative disadvantage in the other product
2- Opportunity costs depend on the relative costs of producing two products not on absolute costs
3- When opportunity costs are the same in all countries there is no comparative advantage and there is no possibility of gains from specialisation
4 - When opportunity costs differ in any two countries and both countries are producing both products it is always possible to increase production of both products by a suitable reallocation of resources within each country
What can we interpret from Stage 1: Fixed Production production possibility boundary?
-Thus the production-possibility boundary is also the
consumption-possibility boundary (With no trade)
- In contrast to the first figure, opportunity cost here varies along the boundary.
- Suppose the economy produces, and consumes, at point a, with X1 of good X and Y1 of good Y, as in part (i) of the figure.
-Next suppose that, with production point a, good Y can be exchanged for good X internationally.
-The production possibilities are now shown by the line t
through point a.
-The slope of t indicates the quantity of Y that exchanges for a unit of X on the international market.
-Although production is now fixed at a, consumption can now be anywhere on the line t- for example, at b.
-This could be achieved by exporting Y1 -Y2 units of Y and importing X2 - X1 units of X
- Since point b (and all others on line tt to the right of a) lies outside the production-possibility boundary, there are potential gains from trade.
- Consumers are no longer limited by their country’s production possibilities.
- Let us assume they prefer point b to point a.
- They have achieved a gain from trade by being allowed to exchange some of their production of good Y for some quantity of good X and thus to consume more of good X than is produced at home.
- Since point b (and all others on line t to the right of a) lies outside the production-possibility boundary, there are potential gains from trade.
- Consumers are no longer limited by their country’s production possibilities.
- Let us assume they prefer point b to point a.
- They have achieved a gain from trade by being allowed to exchange
- some of their production of good Y for some quantity of good X and thus to consume more of good X than is produced at home.
What can we interpret from Stage 2: Variable Production possibility boundary?
-Further opportunity for the expansion of the countryís
-Consumption possibilities: with trade the production boundary may be profitably altered in response to international prices.
-The country may produce the bundle of goods that is most valuable in world markets.
-This is represented by the bundle d in part (ii).
The consumption-possibility set is shifted to the line t0t0 by changing production from a to d and thereby increasing the country’s degree of specialisation in good Y .
-For every point on the original consumption-possibility set, t, there are points on the new set, t0t0 which allow more consumption of both goods; compare point b and f, for example.
- Notice also that, except at the zero-trade point, d, the new consumption-possibility set lies everywhere above the production-possibility curve.
- The benefits of moving form a no-trade position such as a to a trading position such as b or f are gains from trade to the country.
- When production of good Y is increased and the production of good X decreased, the country is able to move to a point such as f by producing more of good Y , in which the country has a comparative advantage, and trading the additional production for good X.
What does Free Trade look like?
(SEE DIAGRAM ON NOTES)
There is a gap between domestic supply and domestic demand that World Supply satisfies (Imports)
What does the graph of Free Trade with Tariffs implemented look like?
- Difference between Sw+Tariff and Sw is the value of the Tariff
- Under tariffs domestic producers allowed to supply more since they are no longer undercut (Q1-Q3)
- Under tariffs domestic demand has contracted as some are priced out of the market (Q2-Q4)
- Imports squeezed but DWL of Consumer Surplus
- World Efficiency reduced
(SEE DIAGRAM ON NOTES)
What does the graph of Free Trade with Quotas implemented look like?
- Under Quota level of domestic imports has fallen from Q1-Q2 to Q1-Q3
- Loss in efficiency
- DWL of consumer surplus
(SEE DIAGRAM ON NOTES)
What are the terms of trade?
Refers to the ratio of the prices of goods exported
to those imported, which determines the quantity of imports that can be obtained per unit of exports.
The terms of trade determine how the gains from trade are shared.
How do you calculate the Terms of Trade?
Tt = Ep/Ip x100
Where:
- Tt denotes terms of trade,
- Ep represents index of export prices
- Ip refers to index of import prices.
A favourable change in the terms of trade - that is, a rise in export prices relative to import prices - means a country can acquire more imports per unit of exports.
