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Economics by David Begg, Gianluigi Vernasca, Stanley Fischer & Rudiger Dornbusch TENTH EDITION ©McGraw-Hill Companies, 2010 Chapter 28 International trade
Exports as % of GDP World trade has grown at an average annual rate of 8 % since Between 1960 and 2009, UK exports as a fraction of GNP rose from 18% to 27%. World exports are now around 20% of world GNP. Source: OECD, Economic Outlook. ©McGraw-Hill Companies, 2010
Trade patterns, (% of world exports) Destination Developed OtherDeveloped Other Origin Developed Countries Other Source: UNCTAD, Handbook of Statistics, 2009 (at ©McGraw-Hill Companies, 2010 As late as 1980, the developed countries were the origin and destination of 71% of world exports, most of this trade being among themselves. The rapid growth of emerging market economies and the economic liberalization of the former Soviet Union and Eastern Europe has changed this.
Merchandise trade patterns, 2008, (% of regions exports) The mature economies of Europe and North America and the Asian economies export mainly manufactures. The Commonwealth of independent states (ex Soviet Union), Africa, and the Middle East mainly export oil and other minerals. agriculturefuels, manufactures minerals World N. America Europe CIS Africa Middle East Asia Sources: GATT, Networks of World Trade, 1955–76; ©McGraw-Hill Companies, 2010
Some important issues Raw materials prices –Less-developed countries (LDCs) have claimed exploitation by industrial countries e.g. by buying raw materials cheaply & selling manufactures dear Agricultural protection –farmers in rich countries benefit from both subsidies and tariff protection. –LDCs lose by selling less –and with a restricted market, at lower prices Manufactured exports from LDCs –some LDCs have had success in exporting manufactures –leading to complaints that jobs are under threat in the industrial countries ©McGraw-Hill Companies, 2010
Some important issues (2) Globalisation –Lower transport costs and better information technology are gradually breaking down the segmentation of national markets and increasing competition between countries. –A trend reinforced by a reduction in tariffs A level playing field? –Poor countries feel that the process is largely dictated by rich countries according to their own self-interest. –Raising the demand for LDC exports, reducing agricultural protection in rich countries would help LDCs substantially. ©McGraw-Hill Companies, 2010
Comparative advantage Trade offers benefits when there are international differences in the opportunity cost of goods. Opportunity cost of a good –the quantity of other goods sacrificed to make one more unit of that good The law of comparative advantage –states that countries should specialise in producing and exporting the goods that they produce at a lower relative cost than other countries. ©McGraw-Hill Companies, 2010
The source of comparative advantage An important difference between countries is in factor endowments, which will be reflected in different relative factor prices –e.g. if country A has relatively abundant capital but relatively scarce labour compared with country B, –then A would tend to specialize in capital-intensive goods, –and B would tend to specialize in labour-intensive products. Comparative advantage may also reflect a relative advantage in technology. ©McGraw-Hill Companies, 2010
Gainers and losers Countries may gain from specialisation and trade –but not all countries may gain equally Commercial policy –is government policy that influences international trade through taxes or subsidies e.g. tariffs –or through direct restrictions on imports and exports. ©McGraw-Hill Companies, 2010
The economic effects of a tariff DD and SS show the domestic demand and supply for a good. If the world price is P w, and there is free trade, domestic firms supply Q s domestic demand is Q d A tariff can stimulate domestic supply and restrict imports. At a domestic price P w +T, where T is the size of the tariff. Domestic demand falls to Q d ', domestic supply rises to Q s and imports fall. and the difference is imported. DD SS Quantity Price PwPw QsQs QdQd Pw+TPw+T Qs'Qs' Qd'Qd' ©McGraw-Hill Companies, 2010
Qs'Qs' Qd'Qd' Quantity The government raises revenue – i.e. there is a transfer to the government, There is a social cost from production inefficiency, given that the good could be imported at P w, and a loss of consumer surplus. and there is a transfer in the form of extra profits to producers. The welfare costs of a tariff DD SS Price QsQs QdQd Pw+TPw+T The tariff leads both to transfers and net social losses. PwPw A B A is the amount society spends by producing goods it could import more cheaply. B is the excess of consumer benefits over social marginal cost that is lost. ©McGraw-Hill Companies, 2010
Tariffs The deadweight burden of a tariff suggests that society suffers from this method of restricting trade. This is the case for free trade. Tariffs have fallen substantially under the GATT –General Agreement on Tariffs and Trade ©McGraw-Hill Companies, 2010
The case for tariffs – good arguments Optimal tariff –a first-best argument –only valid where the importing country is large enough to affect the world price. This policy fulfils the principle of targeting –which says that the most efficient way to attain a given objective is to use a policy that influences that activity directly. –Policies that attain the objective, but also influence other activities are second-best, because they distort those other activities. ©McGraw-Hill Companies, 2010
The case for tariffs – second-best arguments Way of life –an attempt to preserve traditional ways –a production subsidy would be better Suppressing luxuries –an attempt to curb consumption patterns of the rich in a poor society –better achieved by a consumption tax ©McGraw-Hill Companies, 2010
The case for tariffs – second-best arguments (2) Infant industries –an attempt to nurture new activities via learning by doing –a temporary production subsidy probably better Revenue –tariffs raise government revenue –but there are better ways Cheap foreign labour –a non-argument – denies benefits of comparative advantage ©McGraw-Hill Companies, 2010
Other commercial policies Although tariff rates have fallen under GATT, there has been a proliferation of other trade restrictions –quotas –non-tariff barriers administrative regulations that discriminate against foreign goods –export subsidies ©McGraw-Hill Companies, 2010
Social costs arise from production inefficiency and the loss of consumer surplus. An export subsidy DD S Quantity Price PwPw World price Under free trade, with the world price at P w, QdQd consumers demand Q d QsQs production is Q s exports are GE. G E Subsidy With a subsidy, producers produce Q s and supply Q d ' to the domestic market. P w + s Qd'Qd' Q `s ' Exports now rise to AB. A B ©McGraw-Hill Companies, 2010
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