Session 12 - Trade Flashcards
Arguments for curbing international trade
- National security concerns:
reduce reliance on international trade for strategically important goods like weapon systems and food - Protecting infant industries: Govs can foster new industries by protecting emerging businesses from international competition; (positive Evidence: Napoleonic Blockade; Negative evidence: Brazil’s protection of IT industry until the 1990s)
- Preventing unfair competition: price dumping and flooding the market with extremely cheap products - to drive competitors out of the market
- Enforcing minimum standards: domestic laws set standards for labor, environment, and safety,
ensuring fair treatment, cleaner environments, and safer products; importing goods from countries with lower standards undermines these values and can lead to relocation of production to these countries - Saving domestic jobs: no relationship between how much a country imports and its imployment rate
Determinants of International trade
- shipping costs
- trade tariffs
- comparative advantages, which may come from:
+ relatively abundant inputs (e.g. timber Canada)
+ specialized skills (e.g. watchmaking in Switzerland)
+ mass production
What happens if imports are available and the world price is less than domestic equilibrium price?
- price falls to world price
- domestic supply will decline and demand will increase, imports will fill the gap; (domestic sellers only sell up to the quantity of the world price)
Effects of imports on domestic welfare
Generally: total economic surplus increases, but there are winners, in this case the consumers, and losers, the producers
Domestic surplus = domestic consumer surplus + domestic producer surplus
- with imports, domestic buyers pay a lower price and buy more
-> consumer surplus rises - But domestic sellers have to sell at a lower price and sell less
-> producer surplus falls
-> Gains of buyers exceed the losses of the sellers (triangle in between the curves and the world price constant)
Effects of export on trade
- when exports become available & world price is more than domestic equilibrium price, the price rises to world price
- domestic supply will increase and demand will decline, exports will fill the gap
Effects of exports on domestic welfare
total economic surplus increases, but there are winners (producer) and losers (buyer)
Domestic surplus = domestic consumer surplus + domestic producer surplus
- domestic sellers can fetch a higher price and sell more -> producer surplus rises
- domestic buyers have to pay a higher price and buy less
-> consumer surplus falls - the gains to sellers exceed the losses to buyers (triangle above the two curves and underneath the constant of world price)
Arguments for curbing international trade (5)
- National security concerns (reduce reliance on strategically important goods)
- Protecting infant industries (pos. example: France - Napoleonic Blockade - textile industry ; neg: Brazil IT 1990s)
- Preventing unfair competition
- Enforcing minimum standards
- Saving domestic jobs (-> no relationship between how much a country imports and its unemployment rate; job loss due to trade usually only temporary - but adjustment can take long time and lives are negatively affected in the process)
Tools of trade policy
tariff: a tax imposed on imported products
trade red tape: excessive bureaucracy and formalities that inhibit trade
import quota: a limit on the quantity of a good that can be imported
trade agreements: international agreements that often constrain protective measures that can be taken by countries and facilitate int. trade
What are the two pillars of the WTO?
WTO agreements have two pillars:
1 Most-favored-nation status: all member nations must treat all others equally (exception for free-trade agreements)
2 National treatment principle: imported goods and locally produced goods must be treated equally once they have entered a country
Trading currencies - how are currencies traded? What is it called if it gets more expensive/cheaper?
Currencies are traded at a nominal exchange rate: the price of a country’s currency in terms of another country’s currency
currency becomes more expensive -> speak: it appreciates against another currency
if it becomes cheaper, it depreciates against another currency
What are determinants of currency demand? (Export)
Exports:
demand for domestic currency will increase if exports rise due to:
* Strong global economy
* Less trade barriers
* Domestic innovation
* Rising foreign prices
* Falling domestic prices
Determinants of currency demand ? (financial inflows)
Financial inflows:
demand for domestic currency will increase if financial inflows rise due to:
* Higher domestic interest rates (conditional on risk)
* Higher domestic profitability of investments (conditional on risk)
* Higher foreign political risk (conditional on foreign interest rates)
* Higher expected future value of the domestic currency
Egon
Determinants of currency supply? (Imports)
Imports:
supply of domestic currency will increase if imports rise due to:
- Strong domestic economy
- Less trade barriers
- Foreign innovation
- Falling foreign prices
- Rising domestic prices
Determinants of currency supply? (financial outflows)
Financial outflows: supply of domestic currency will increase if financial outflows rise due to:
- Lower domestic interest rates (conditional on risk)
- Lower domestic profitability of investments (conditional on risk)
- Lower foreign political risk (conditional on foreign interest rates)
- Lower expected future value of the domestic currency
