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ECON 102 > Lectures 3&4 > Flashcards

Lectures 3&4 Flashcards

1
Q

What was the result of the pre-industrial period?

A

“The Great Stagnation”

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2
Q

When did the great stagnation cease?

A

With the first unbundling (1820)

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3
Q

What are A7 countries?

A

China, India/Pakistan, Iraq, Iran, Turkey, Italy/Greece, Egypt

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4
Q

What are G7 countries?

A

Germany, France, US, Canada, UK, Italy, Japan

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5
Q

Phase 1: _______ moves to _________.

A

Consumption moves to production

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6
Q

Phase 2: ________ moves to __________.

A

Production moves to consumption.

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7
Q

What is the first unbundling reversal caused by?

A

It’s caused by lower trade costs driving the “unbundling” of production and consumption

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8
Q

True or False?
In the first unbundling, production no longer needs to be near consumption: beginning of “made here, sold there” and vice versa.

A

True

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9
Q

Who are the drivers of the first unbundling?

A

Steam revolution and trade liberalization

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10
Q

Define economic globalization

A

Integration of markets across space

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11
Q

What was the estimated start of the first unbundling? How do we know this?

A

1815-1820.

A good indicator of integration of markets across space is the convergence of international prices.

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12
Q

A good indicator of integration of markets across space is the ____________.

A

Convergence of international prices

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13
Q

Define demand

A

Demand is the quantity of a good consumers are willing to purchase for a given price. It results from consumers maximizing their utility (=happiness) subject to their given restraint

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14
Q

Define the supply

A

The supply is the quantity of a good producers are willing to sell for a given price. It results from producers maximizing their profits (=sales - costs)

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15
Q

When does the equilibrium occur?

A

When demand=supply: at the equilibrium price, producers are willing to sell the same quantity that consumers want to buy, the equilibrium quantity

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16
Q

Changes in the supply or demand will have an effect on the ________.

A

Equilibrium

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17
Q

Price variations will also depend on whether the market is ______________.

A

Local or not

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18
Q

If the market for a good is _______, the price and quantity will typically be more stable than if it is local

A

Global

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19
Q

Stable prices over time and across regions are a sign of a __________ market. _________ of prices is even more so.

A

Globalized

Convergence

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20
Q

Why 1815-1820?

A

The convergence of prices was permitted by changes in the political landscape:

  • 1815 marks the end of the Napoleonic wars with his defeat in Waterloo
  • The congress of Vienna in 1820 stabilized intra-European and international relations
  • “Pax Britannica”: British empire is becoming the first superpower through trade and industrialization
  • This power was not based on Mercantilism (piling up gold)
  • Trade and industrialization rose together and industrialization led to economic and military power
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21
Q

First trigger of the start: the Steam Revolution

The industrial revolution is a revolution in __________. It led to a huge reduction in _____________ (in particular transportation) both __________________ as railroad spread from the 1840s. The electric telegraph (using Morse code) transformed ___________, and the first permanent telegraph cable was successfully laid across the Atlantic Ocean in the year _______.

A
  • Energy conversion
  • Trade costs
  • Nationally and internationally
  • Communication
  • 1866
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22
Q

Railroads spread from the ______.

A

1840s

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23
Q

By ________, oceanic travel is transformed

A

1850

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24
Q

Second trigger of the start: Trade liberalization

_____________: trade costs fluctuate with war and peace
_____________: trade costs came down from between 40% and 60%
_____________: spikes due to wars
_____________: steady decline resumes

A
  • 1750-1820
  • 1820-1905
  • 1905-1945
  • 1945-1990
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25
Q

With lower trade costs (in the first unbundling), ____________ no longer needs to be near _____________.

A

Production no longer needs to be near consumption

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26
Q

The first unbundling unfolded in 3 separate acts:

A
  1. Pre-WW1 (1815-1820), where trade flourished globally (5 main changes)
  2. Rebundling (1914-1950), where countries close borders, tariffs increase, production and consumption are rebundled
  3. Post-WW2 unbundling (1950-1990), where tariffs decrease, and bilateral trade agreements increase: more unbundling
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27
Q

Name the 5 main changes of the pre-WW1 unbundling (1820-1914)

A
  1. Trade boomed
  2. Northern and G7 industrialization
  3. Southern and A7 de-industrialization
  4. Urbanization
  5. “The great divergence”

(These 5 steps apply all the way to 1990, but they appeared strongly in the period 1820-1914.)

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28
Q

Booming trade is triggered by ______________.

A

Britain’s move towards free trade

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29
Q

When did free trade policies spread to continental Europe?

A

1846-1879

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30
Q

Pro-industrialization protectionism rises in the continent from 1879-1914, in the name of the ___________.

A

“Infant-industry argument”

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31
Q

What’s another name for the “Infant-industry argument”?

A

The “Import-substitution industrialization”

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32
Q

What does the “Infant-industry argument” policy aim to do?

A

This policy aims at protecting domestic industries until they get competitive on the world market
Until then, tariffs are imposed on imports

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33
Q

Ad valorem tariff: tax expressed as _______________.

A

Expressed as a % of the purchasing price

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34
Q

Specific tariff: tax expressed _________________.

A

Expressed in $ per unit (per lb, piece, gallon, etc.)

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35
Q

Why was the concept of “Infant-industry argument” criticized?

A
  • Why not target directly the source of the problem? (Financing? Lack of entrepreneurship? Training?)
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36
Q

For tariffs in the 19th century, independent nations in America tended to have high ________.

A

Tariffs

37
Q

For tariffs in the 19th century, __________________ had intermediate tariffs.

A

British dominions (Australia, Canada, New Zealand)

38
Q

For tariffs in the 19th century, UK and the big Asian countries tended to have _________ tariffs.

A

Low

39
Q

“Northern industrialization”

A
  • The UK industrializes first (Napoleonic wars make it difficult for Europe to industrialize)
  • Industrialization spreads to Europe and North America post-Napoleon
  • The US, Germany and France around 1850
  • Canada, Italy and Japan industrialize later (late 1800s)
40
Q

“Southern de-industrialization”

A
  • In 1750, the Ancient 7 (A7) accounted for 73% of world manufacturing output (50% in 1830, 7.5% by 1913!)
  • Mainly China and India are de-industrializing
41
Q

Why did “Northern” industrialization and “Southern” de-industrialization occur?

A
  • Transportation is easier but production remains “clustered” as it is costly to move ideas (high communication costs)
  • Factories benefit from economies of scale
  • Clustering of manufacturing ignites innovation and growth
42
Q

Northern innovations stay in _________ due to high communication costs

A

North

43
Q

What is the virtuous cycle for the north, but vicious for the south?

A

Comparative advantage -> Industrial exports -> Industrial clustering -> Industrial competency (process repeats)

44
Q

Concept: Comparative advantage

A

(Proposed by David Ricardo)
A firm/country has a comparative advantage in the production of a good over another firm/country if its opportunity cost of producing that good is lower

45
Q

What kinds of sources can a comparative advantage come from?

A

Multiple sources: abundance in natural resources, endowment in inputs (land, labor, physical and human capital), increasing returns to scale, institutions, etc.

46
Q

Concept: Opportunity cost

A

The opportunity cost of choosing an alternative is the value of the next best alternative that was given up

47
Q

Concept: Economies of scale

A

A firm/industry experiences economies of scale if the average cost of production, AC(q) = (Cq/q), decreases as q increases.

  • New firms typically experience economies of scale: with few employees, any extra employee is very productive and the average cost of producing more unit decreases
48
Q

What are the 2 cases of economies of scale?

A
  1. Internal economies of scale (occur when the quantity is produced by one firm)
  2. External economies of scale (occur when the quantity is produced by all the firms in a given area)
49
Q

Concept: Internal economies of scale

A

Internal economies of scale occur when the average cost of the firm level decreases when quantity produced increases

50
Q

Concept: External economies of scale

A

External economies of scale occur when the average cost of production of all the firms in a country/region/city decreases on the quantity produced in the area increases

51
Q

Lower trade costs can lead to _____________ for a product

A

A greater demand (production will therefore increase to satisfy the expanded demand)

52
Q

Urbanization after the first unbundling was heavily based towards the _____________.

A

Atlantic economies

53
Q

Strong correlation between urbanization and _________. Why? ___________: returns to “being smart” increases thanks to globalization and technological change, and humans get smart by hanging around smart people.

A
  • Incomes

- Ed Glaeser

54
Q

Growth and “the Great Divergence”

G7 countries (within each nation) have a _________ innovation and growth, which leads to __________ and ________ wages.

Developing nations (including A7) (within each nation) have a _________ innovation and growth, which leads to __________ and ________ wages.

A
  • High
  • Knowhow/Labour
  • High wages
  • Low
  • Knowhow/Labour
  • Low wages
55
Q

“The Great Divergence”

A
  • The growth take-offs in G7 economies created the “great divergence”
  • It was a consequence of the reduction of costs of moving goods and a high cost of moving ideas (high communication costs)
  • Freer trade led to specialization and micro-clustering which yielded faster innovation in the North, and stayed in the North due to the high communication costs
  • High growth in the North (G7) and low growth in the South (A7)
56
Q

For the first unbundling, countries specialize in the production of goods for which they have a ___________.

A

Comparative advantage

57
Q
  1. Rebundling (1914-1945)
A
  • World wars and the Great Depression (international trade is reduced as a consequence, inter-wars tariffs are driven by backlash against globalization, fascism pushes protectionism, the UK is not willing to support world trading as it used to)
  • Period of nationalism and protectionism
  • A need for global institutions, practices and cooperation among nations arises
58
Q
  1. Post-WW2 unbundling (1945-1990)
A
  • Trade is institutionalized and liberalized with the General Agreement on Tariffs and Trade (GATT) in 1947, succeeded by the WTO in 1994
  • Colonies became nations
  • Advances made in transportation (containerization, refrigerated ships and trucks, air cargo)
59
Q

Containers

A
  • The shipping container has transformed global trade
  • The first container trip (April 1956) from Newark to Houston
  • Containers allow to save time and money
  • Containers are used in all modes of transportation: ships, trucks, trains
  • International trade is now standardized, making it faster and cheaper
60
Q

What are the 3 main waves of liberalization?

A
  • Wave 1: 1945-1985
  • Wave 2: 1986-2000
  • Wave 3: 2001-2018
61
Q

Wave 1: 1945-1985

A

Multilateralism and regionalism advance together

62
Q

What does GATT mean?

A

General Agreement on Tariffs and Trade

63
Q

1947-1958

A
  • GATT starts: mostly a “club” of WW2 winners
  • US leadership
  • Germany joins GATT in 1950
  • Japan joins GATT in 1955
  • Trade liberalization is mainly for manufacturing goods, not so much for agriculture or services
64
Q

Role 1 of the GATT (now WTO) (5 in total)

A
  1. It is a multilateral forum aimed at negotiating freer trade and avoid/restrict the use of non-tariff barriers. It also requires to declare export subsidies
65
Q

Role 2 of the GATT (now WTO) (5 in total)

A
  1. It is based on the fundamental principle of “non-discrimination”:
    - The “most favoured nation”: every country belonging to GATT/WTO must be treated the same. If a country benefits from a lower tariff, all members should benefit too (exceptions allowed if the goal is free trade)
    - “National treatment”: once a product has crossed the border, it should be treated “no less favourably” than a domestic product
66
Q

Role 3 of the GATT (now WTO) (5 in total)

A
  1. Binding tariff schedules: once tariffs have been negotiated, they should not be increased
67
Q

Role 4 of the GATT (now WTO) (5 in total)

A
  1. Tariffs can be temporarily raised for specific products in particular situations
    - In a reaction to foreign subsidies creating injuries in a domestic industry
    - When a surge of imports creates serious injury to domestic products
    - If the GATT/WTO judges this as being inconsistent with the GATT charter, countries can impose retaliatory tariffs
68
Q

Role 5 of the GATT (now WTO) (5 in total)

A
  1. Dispute resolution mechanism (under threat since Jan 2020)
69
Q

1958-1965

A
  • EEC (European Economic Community) comes into force; customs union implemented (1958-1968). Triggers a domino effect
  • EFTA (European Free Trade Association) is formed by the UK in reaction (still exists with non EU countries like Switzerland, Norway, Iceland and Lichtenstein)
  • The UK applies to the European Union in 1961 (joins in 1973)
  • 1962: US trade Act that allows formula tariff cuts
  • Important GATT round of negotiations: Kennedy Round (1962-1967)
70
Q

Concept: Formula tariff cuts

A

Instead of negotiating each tariff rate, a formula is negotiated and applies to all tariff rates under consideration:

  • Linear tariff cut: A percentage cut is negotiated, and the cut is applied to all existing rates
  • Nonlinear tariff cut: More than one tariff cut is negotiated
71
Q

The “Swiss Formula”

A

t-new = (A * t-old)/(A + t-old)
and A is negotiated (Main advantage: only A needs to be negotiated!)

Eg. Assume A = 30%. If t-old = 45%, then t-new = 18%

72
Q

Concept: Regional agreements

A
  • A RTA (Regional Trade Agreement) is a treaty between 2 or more governments that define the rules of trade for all signatories. There are 2 types of regional agreements:
    1. Free trade area (free trade among members. Every members keeps its own tariff schedule with respect to non members - EG. NAFTA)
    2. Custom union (free trade almond members with common tariff schedule with respect to non members - Eg. EEC, now EU)
  • Regional agreements are discriminating: free among members, costly to non members
  • Can be costly to members too if there is trade diversion or no trade creation
73
Q

Concept: Trade creation

A

Trade creation: creation of new flows of international trade between members for goods/services:

  • New imports benefiting domestic consumers and new exports benefiting domestic firms
  • Both members gain from new trade and the volume of trade increases
74
Q

Concept: Trade diversion

A

Trade diversion: trade increases between 2 members but at the expense of trade with a non members

75
Q

Big year: 1965

A
  • Regionalism spreads beyond Europe (US-Canada Auto Pact (1965), Australia-New Zealand FTA (1965), First postwar Latin American FTAs (1960 and 1961))
  • Unilateral preferences to developing nations (special and differential treatment): Low tariffs are set on goods coming from countries designed as developing countries
76
Q

What does FTA mean?

A

Free Trade Agreement

77
Q

1962-1973: South-South regional trade agreements

A
  • Decolonization led to GATT memberships
  • GATT’s Kennedy Round tariff cuts phased in
  • Non-tariff barriers rise (which partly offsets tariff liberalization)
78
Q

Concept: Non-Tariff Barriers (NTB)

A

NTB are barriers to trade other than tariff such as:

  • Quotas (quantitative restrictions - cannot import more than a specific number of units/tons per year)
  • Anti-dumping (process through which domestic firms ask governments to investigate whether specific foreign firms “dump” (i.e. Sell below “fair price”))
  • Domestic procurement policies (purchases by governments restricted to domestic firms)
  • Other (subsidies, technical barriers, import licensing procedures, etc)
79
Q

Concept: Countervailing measures

A

They’re used to offset the effect of a country subsidizing a good it exports:
- If an exported good is subsidized by its country, foreign countries have a right to impose a tariff on that good equal to the rate at which it is subsidized. It is called a countervailing duty

80
Q

Big year: 1973

A
  • EEC first enlargement (UK, DK and IRL join) that triggers FTAs
  • GATT’s Tokyo’s round launched
81
Q

1973-1985

A
  • Tokyo round (1973-1979) is launched and completed (1st round to tackle beyond tariff issues; subsidies and countervailing measures, technical barriers to trade, import licensing procedures, government procurement, anti-dumping)
  • Regionalism advances in Africa and Asia
  • Oil shocks and stagflation make liberalization difficult, and non-tariff barriers continue to rise through quotas in particular
82
Q

Wave 2: 1986-2000

A

Big year: 1986

  • Single European Act establish plain to form Single Market by 1992
  • Canada and US launch FTA talks to deepen and widen the 1965 Auto Pact
  • Uruguay round launch
  • 1986-1990: deepening of North-North RTA (Regional Trade Agreement)

1990-2001: North-South regionalism is launched

  • 1990: US-Mexico became NAFTA
  • Mercosur in 1991
  • The fall of Berlin’s wall (1989) triggers RTAs between the EU and Eastern European countries
  • GATT deepens to WTO with the end of the Uruguay round in 1994 (effective 1995)
83
Q

Concept: Effect of a tariff on domestic country

A
  • A tariff raises domestic prices to P^W + t where P^W is the initial world price. P* is the autarky equilibrium price
  • It helps import-competing industries
  • Harms consumers as demand is downward sloping
  • The government earns a revenue equal to the tariff * import levels
84
Q

Concept: tariff properties

A
  • The level of a tariff balances supply and demand for protection
  • Demand for protection = marginal benefit to special interests (domestic producers)
  • Supply of protection = government’s willingness to harm consumers and national welfare for political gains (votes, lobbies push, campaign contributions, etc)
  • The level of tariff depends upon the relative political strength of special interest groups (mostly the import-competing domestic industry)
85
Q

Why is liberalization mostly bilateral or multilateral?

A
  • Countries are stick in a prisoner’s dilemma if they don’t negotiate a joint binding agreement
  • Each country can decide on free trade or protectionism (with tariffs, for instance)
  • When Canada chooses “Free trade”, the US prefers “Protectionism” to “Free trade”
  • When Canada chooses “Protectionism”, the US also prefers “Protectionism” to “Free trade”

Concept: Prisoner’s dilemma

  • The US prefers “Protectionism” no matter what Canada chooses - “Protectionism” is a dominant strategy for the US in this example (and vice versa for Canada)
  • Consequence: US and Canada end up choosing “Protectionism”, where payoffs (general surplus) are lower
  • Only way to break the dilemma: cooperate and agree and a binding agreement (hence NAFTA, EU, GATT/WTO, etc.)
  • Countries making decisions unilaterally leads to the least desirable outcome
86
Q

Why does liberalization encourage further liberalization?

A
  • Reciprocal trade talks re-align political economy forces inside each participating nation
  • Tariff cuts become politically optimal (governments find it politically optimal to remove tariffs they previously found optimal to impose since multilateral negotiations “politically activate” a new special interest group: exporters)
  • Multilateral negotiation makes exporters into anti-protectionists
  • As export sectors strengthen with each tariff cut, they gain in political influence, calling for more tariff cuts
  • The bigger the trade blocks, the stronger the incentives for non-members to join to avoid trade diversion and foster trade creation (network effect)
87
Q

Concept: Domino effect

A
  • Formation or deepening of a trade block realigns the political economy forces inside non member nations
  • Pro-membership forces want to prevent trade diversion and foster trade creation
  • Non members join in if the export sector is politically larger than the import competing sectors
  • If a new member joins, “forces for inclusion” get stronger for non members
88
Q

Why do tariff liberalization through GATT/WTO and FTAs have a tendency to bring more NTB?

A
  • Lobbies in import-competing industries find other ways to influence the government
  • These new ways are more specific/targeted
  • It decreases the magnitude of trade liberalization

ECON 102 (6 decks)

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