midterm pol 120 Flashcards
(42 cards)
Why do countries trade with one another?
Efficiency from specializing; comparative advantage
a. Absolute advantage – costs of producing goods
b. Comparative advantage (Ricardo) – efficiency
gains from specialization
c. Heckscher-Ohlin – abundant and scarce factors
of production. Implications for
supporting/opposing free trade
Who are the domestic winners or losers from free trade?
If you have an abundant factor and you are trading, free trade is great
if you have a scarce factor and you are involved in free trade, free trade is terrible
Why do countries restrict trade?
To protect domestic groups harmed by free trade; to
provide benefits for politically influential groups.
Tariff =
= a tax that is imposed by a government
on imported goods or services.
Quota =
Quantitative limit imposed by
government on the amount of a good or
service that may be imported during a period
of time.
(c) Lauren Peritz 2023
subsidy=
A sum of money granted by the
government to assist an industry or business
so that the price of a commodity or service
may remain low or competitive.
What is the international consequence of a trade
barrier?
If country A has a tariff, it often hurts country B and it can
be inefficient.
How is free trade is an international collective action
problem?
Mutual incentive to restrict; collective benefits if everyone
liberalizes trade. Prisoner’s dilemma.
– Solve collective action problem with a free trade TREATY
ABSOLUTE advantage
when it can produce a unit of a good with less
labor (or another input) than another country can.
ex US produces 2 computers with $100 inputs
– Brazil produces 1 computer with $100 inputs
– US has an Absolute advantage in producing computers
COMPARATIVE advantage
if the opportunity cost
of producing that good in terms of other goods is lower in that country than it is in
other countries.
* Example:
– US produces 2 computers OR 10 pairs of shoes with $100 inputs
– Brazil produces 1 computer OR 10 pairs of shoes with $100 inputs.
– US has comparative advantage in computers: 2 computers:10 shoes = 1:5
– Brazil has comparative advantage in shoes: 1 computer:10 shoes = 1:10
Heckscher-Ohlin
A country will have a comparative advantage in, and thus will tend to export, those goods whose production requires the intensive use of the factor of production that that country
has in relative abundance.
H-O Implications
What happens if I own the abundant factor of production and my country allows free trade?
– (unskilled) worker in Bangladesh
– Farmer in US
What happens if I own the abundant factor of
production and my country allows free trade?
– (unskilled) worker in Bangladesh
– Farmer in US
* Free trade is GREAT!
– Bangladesh: worker wages go up*
– US: price of cotton goes up
What happens if I own the scarce factor of
production and my country allows free trade?
– (unskilled) worker in US
– Farmer in Bangladesh
What happens if I own the scarce factor of
production and my country allows free trade?
– (unskilled) worker in US
– Farmer in Bangladesh
* Free trade is TERRIBLE!
– US: worker wages go down
– Bangladesh: price of cotton goes down
Owners of abundant factors should promote free
trade.
– Owners of scarce factors should oppose free
trade.
Stolper-Samuelson Theorem
in a country that specializes in production of a given
good, the owners of the relatively abundant factor of
production in that country will experience a gain in
their returns and real incomes as a result of trade
liberalization, and the owners of the relatively scarce
factor of production will sustain a drop in their
returns of real incomes
International Cooperation Problem
International collective action problem of
FREE TRADE is like the canonical Prisoner’s
Dilemma
1. Collective benefits from cooperating on free trade
2. Individual incentive to “cheat” = restrict trade
+ Uncertainty about what the other country will do
Countries collectively benefit from free trade.
– Mutual gains from specialization according to
comparative advantage
2. A single country can benefit from a trade barrier,
provided all other countries maintain open trade
– Individual countries sometimes want to restrict trade
(e.g. sugar quota helps US)
– Trade barriers by country A hurt country B
* Specifically: hurt foreign producers (e.g. Mexican farmers
who export sugar to US)
Countries are UNCERTAIN about what their
trading partners will do.
* How do they solve this problem? Reduce
uncertainty.
– Create a free trade agreement
* clearly establishes standards
* provides enforcement
What are some ways that countries restrict trade?
Trade barriers include tariffs, subsidies and quotas.
* Trade barriers typically benefit a specific set interest
group or industry (e.g. farmers, steel manufacturers
Which interest groups are best at getting trade
protection from their government?
Groups that mobilize and act collectively
– Groups that spend money on lobbying
Increasing exposure to trade can hurt some groups.
They are likely to mobilize and demand trade
protection.
– Does this lead to class conflict or urban-rural conflict?
Depends on the factor endowments.
When developing countries democratize, they are
likely to adopt more liberal trade policies. Why?
Expansion of the selectorate increases demand for trade
liberalization.
Many kinds of trade barriers
Tariff
– Production Subsidy
– Import Quota
* Often, trade barriers advantage certain groups (e.g.
farmers, steel manufactures) at the expense of other
groups (e.g. taxpayers, foreign producers).
Domestic Collective Action
Public goods
– Non-excludable – goods no one can be prevented
from consuming for free.
* E.g. national defense, law and order, public radio…
lobbying by an interest group
* Free-Rider problem
– Non-excludability creates incentives to “free-ride”
– When people free-ride, the desired good is under-
produced or not produced at all.
Solutions to the Free Rider Problem?
Exclusivity: Smaller groups are better at
overcoming free-rider problem.
* Lower organizational costs
* Bigger impact of individual’s contribution
2. Privileged Groups: Some members benefit more
than others.
* Benefits are concentrated so members that gain most may
provide good even if others free ride.
* E.g. oligopolistic (concentrated) industries
Collective Action & Demand for Foreign
Economic Policy
Interest group politics
– Government policies that benefit a group do not
differentiate between individuals in that group.
* E.g. tariff of steel imports or a subsidy to sugar growers.
* Political influence
– Explains why producers tend to be organized while
consumers are not.
– Explains why government faces strong pressure for
protection from import-competing industries but
weak pressure from consumers.
Preferences + Political Influence à Policy
Domestic winners and losers from trade
– Reflect factors of production
– Generates preferences
* Who has more political influence?
– Group that can better overcome collective action
problems
Rogowski (1987)
Q: What are the political effects of increasing
exposure to trade?
* A: Increasing exposure to trade affects
political cleavages (who allies with whom).
The particular cleavages depend on relative
factor abundance.
add rural conflict and class conflict
