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International Trade. The Gains from Trade n The law of comparative advantage < specialisation as the basis for trade < absolute advantage < comparative.

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Presentation on theme: "International Trade. The Gains from Trade n The law of comparative advantage < specialisation as the basis for trade < absolute advantage < comparative."— Presentation transcript:

1 International Trade

2 The Gains from Trade n The law of comparative advantage < specialisation as the basis for trade < absolute advantage < comparative advantage < the gains from trade based on comparative advantage n The law of comparative advantage < specialisation as the basis for trade < absolute advantage < comparative advantage < the gains from trade based on comparative advantage

3 Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

4 Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

5 Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

6 Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

7 The Gains from Trade n The limits to specialisation and trade n The terms of trade < P X /P M n Other reasons for gains from trade < decreasing costs < differences in demand < increased competition < trade as an ‘engine of growth’ < non-economic advantages n The limits to specialisation and trade n The terms of trade { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/12/3570874/slides/slide_7.jpg", "name": "The Gains from Trade n The limits to specialisation and trade n The terms of trade < P X /P M n Other reasons for gains from trade < decreasing costs < differences in demand < increased competition < trade as an ‘engine of growth’ < non-economic advantages n The limits to specialisation and trade n The terms of trade

8 Arguments for Restricting Trade n Methods of restricting trade < tariffs < quotas < administrative barriers < other n Arguments for restricting trade < infant industry argument < changing comparative advantage < to prevent dumping n Methods of restricting trade < tariffs < quotas < administrative barriers < other n Arguments for restricting trade < infant industry argument < changing comparative advantage < to prevent dumping

9 Arguments for Restricting Trade n Arguments for restricting trade (cont.) < to prevent establishment of a foreign-based monopoly < to spread risks < externalities < pursuing national interests (but against world interests) F exploiting monopoly power F protecting declining industries < non-economic arguments n Arguments for restricting trade (cont.) < to prevent establishment of a foreign-based monopoly < to spread risks < externalities < pursuing national interests (but against world interests) F exploiting monopoly power F protecting declining industries < non-economic arguments

10 Arguments for Restricting Trade n Problems with protection < protection as ‘second best’ < world multiplier effects < retaliation < cushions inefficiency < bureaucracy n Measuring the efficiency loss from protection n Problems with protection < protection as ‘second best’ < world multiplier effects < retaliation < cushions inefficiency < bureaucracy n Measuring the efficiency loss from protection

11 The cost of protection O P Q S dom (=MC) Q1Q1 Q2Q2 S world PWPW D dom

12 O P Q S dom (=MC) S world + tariff S world a d e cb Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom Area edbc equals loss of consumer surplus The cost of protection

13 O P Q S dom (=MC) S world + tariff S world a d e cb 1 2 3 4 Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom Area 3 equals gain in tariff revenue Area 1 equals gain in producer surplus The cost of protection

14 O P Q S dom (=MC) S world + tariff S world a d e cb 1 2 3 4 Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom Areas 2 + 4 equals net loss The cost of protection

15 n History of protection < Pre-war growth in protection < Post-war reduction in protection and the role of GATT F the growth in world trade n History of protection < Pre-war growth in protection < Post-war reduction in protection and the role of GATT F the growth in world trade World Attitudes towards Trade and Protection

16 Growth in world real GDP and world merchandise exports Source: Trade Statistics, WTO (www.wto.org)

17 Growth in world real GDP and world merchandise exports Growth in real GDP Source: Trade Statistics, WTO (www.wto.org)

18 Growth in world real GDP and world merchandise exports Growth in real GDP Growth in merchandise exports Source: Trade Statistics, WTO (www.wto.org)

19 n Re-emergence of protectionism in 1980s < the increasing use of non-tariff barriers n The Uruguay Round < aims of the negotiations < problems in reaching agreement < the agreement < assessing the agreement n Re-emergence of protectionism in 1980s < the increasing use of non-tariff barriers n The Uruguay Round < aims of the negotiations < problems in reaching agreement < the agreement < assessing the agreement World Attitudes towards Trade and Protection

20 n The World Trade Organisation < WTO more powerful than GATT < WTO rules F non-discrimination F reciprocity F general prohibition of quotas F fair competition F binding tariffs < attitudes of the WTO < WTO activity in recent years F resistance from various groups to unfettered trade n The World Trade Organisation < WTO more powerful than GATT < WTO rules F non-discrimination F reciprocity F general prohibition of quotas F fair competition F binding tariffs < attitudes of the WTO < WTO activity in recent years F resistance from various groups to unfettered trade World Attitudes towards Trade and Protection

21 Trading Blocs n Types of preferential trading arrangement < free trade areas < customs unions < common markets F features of a full common market n Direct effects of a customs union < trade creation < trade diversion n Types of preferential trading arrangement < free trade areas < customs unions < common markets F features of a full common market n Direct effects of a customs union < trade creation < trade diversion

22 Trading Blocs n Long-term effects of a customs union < longer-term advantages F internal economies of scale F external economies of scale F better terms of trade F increased competition between members < longer-term disadvantages F certain regions of the union may suffer F possibility of oligopolistic collusion F administrative costs n Long-term effects of a customs union < longer-term advantages F internal economies of scale F external economies of scale F better terms of trade F increased competition between members < longer-term disadvantages F certain regions of the union may suffer F possibility of oligopolistic collusion F administrative costs

23 Preferential Trading in Practice n Preferential trading in practice < the EU < the EEA < NAFTA F the advent of NAFTA F experience to date F proposals to extent to an all Americas free trade area < the Asia-Pacific Economic Co-operation forum (APEC) < other free trade areas / customs unions n Preferential trading in practice < the EU < the EEA < NAFTA F the advent of NAFTA F experience to date F proposals to extent to an all Americas free trade area < the Asia-Pacific Economic Co-operation forum (APEC) < other free trade areas / customs unions

24 The European Union n Historical background n The economic nature of the EU n Development of common EU policies < Common Agricultural Policy < regional policy < competition policy < tax harmonisation < social policy < trade policy n Historical background n The economic nature of the EU n Development of common EU policies < Common Agricultural Policy < regional policy < competition policy < tax harmonisation < social policy < trade policy

25 The European Union n The single market < historical background < the Single European Act < completing the single market n The benefits of the single market < trade creation < reduction in the direct costs of barriers < economies of scale < greater competition n The single market < historical background < the Single European Act < completing the single market n The benefits of the single market < trade creation < reduction in the direct costs of barriers < economies of scale < greater competition

26 The European Union n Criticisms of the single market < radical economic change is costly < adverse regional effects < development of monopoly / oligopoly power < trade diversion < political objections: loss of sovereignty n Developments of the single market < evidence of economic benefits < eliminating remaining barriers F Internal Market scoreboard < effects of expansion of the EU n Criticisms of the single market < radical economic change is costly < adverse regional effects < development of monopoly / oligopoly power < trade diversion < political objections: loss of sovereignty n Developments of the single market < evidence of economic benefits < eliminating remaining barriers F Internal Market scoreboard < effects of expansion of the EU

27 Trade and Developing Countries n Trade strategies < primary outward looking < secondary inward looking F import-substituting industrialisation (ISI) < secondary outward looking F possibly complemented by primary inward looking n Trade strategies < primary outward looking < secondary inward looking F import-substituting industrialisation (ISI) < secondary outward looking F possibly complemented by primary inward looking

28 Trade and Developing Countries n Approach 1: exporting primaries < justification for exporting primaries F exploits comparative advantage F a 'vent for surplus' F an 'engine for growth' < problems with traditional trade theory F comparative costs change over time F benefits may not flow to nationals F trade my lead to greater inequality F externalities from mines and plantations n Approach 1: exporting primaries < justification for exporting primaries F exploits comparative advantage F a 'vent for surplus' F an 'engine for growth' < problems with traditional trade theory F comparative costs change over time F benefits may not flow to nationals F trade my lead to greater inequality F externalities from mines and plantations

29 Trade and Developing Countries n Exporting primaries (cont.) < long-term problems for primary exporting countries F low income elasticity of demand F protection in advanced countries F technological developments synthetic substitutes miniaturisation F rapid growth in imports F adverse movements in terms of trade n Exporting primaries (cont.) < long-term problems for primary exporting countries F low income elasticity of demand F protection in advanced countries F technological developments synthetic substitutes miniaturisation F rapid growth in imports F adverse movements in terms of trade

30 World primary commodity prices (1990 = 100)

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34 Average annual changes in prices of various products

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36 Trade and Developing Countries n Approach 2: ISI < justifications F problems of primary exporting F dynamic potential in manufacturing infant industries rapid technological advance < patterns of protection F selecting industries for protection F tariff and quota escalation F attracting multinational investment n Approach 2: ISI < justifications F problems of primary exporting F dynamic potential in manufacturing infant industries rapid technological advance < patterns of protection F selecting industries for protection F tariff and quota escalation F attracting multinational investment

37 Trade and Developing Countries n Approach 2: ISI (cont.) < adverse effects of ISI F often counter to comparative advantage F tends to cushion inefficiency encourages establishment of monopolies F artificially low interest rates use of capital-intensive techniques F encourages rural–urban migration F adverse effects on rural sector F leads to greater inequality F environmental problems F limit to home market n Approach 2: ISI (cont.) < adverse effects of ISI F often counter to comparative advantage F tends to cushion inefficiency encourages establishment of monopolies F artificially low interest rates use of capital-intensive techniques F encourages rural–urban migration F adverse effects on rural sector F leads to greater inequality F environmental problems F limit to home market

38 Trade and Developing Countries n Approach 3: exporting manufactures < transition from inward-looking to outward- looking industrialisation F a neutral trade approach F active promotion of manufactured exports < benefits from exporting manufactures F conforms more closely with comparative advantage F increased competition F increased investment F more employment and greater equality n Approach 3: exporting manufactures < transition from inward-looking to outward- looking industrialisation F a neutral trade approach F active promotion of manufactured exports < benefits from exporting manufactures F conforms more closely with comparative advantage F increased competition F increased investment F more employment and greater equality

39 Growth rates and export performance of selected secondary outward-looking countries

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44 Trade and Developing Countries n Approach 3: exporting manufactures (cont.) < drawbacks of exporting manufactures F possible retaliation from advanced countries but attitudes of WTO F competition from other developing countries F vulnerability to world fluctuations world recessions speculation < trade between developing countries F trade blocs of developing countries n Approach 3: exporting manufactures (cont.) < drawbacks of exporting manufactures F possible retaliation from advanced countries but attitudes of WTO F competition from other developing countries F vulnerability to world fluctuations world recessions speculation < trade between developing countries F trade blocs of developing countries


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