1. April 2014Econ 455 International Trade and Finance PPTs series 3

2. April 2014Econ 455 Introduction Part I Trade 1. Theories of Trade a) Motives for Trade b) Absolute Ádvantage c) Comparative Advantage d) Extensions 2. Barriers to Trade a) Non.tariffary Barriers b)Tariffs c) Quotas d) Subsidies Part II Finance 1.The Balance of Payments a) Concept and Structure of BoP b) BoP and GDP c) BoP goals 2. Foreign exchange a) Exchange rates and Markets b) Exchange rate Mechanics c) Exchange Rate Policies 3: Exchange Regimes a) Gold Standard b) The Bretton Woods System c) Extansions d) Controversies 4. Agents and their Activities 5. Selected Exchange Rate Theories List of Contents

3. April 2014Econ 455 Part I Trade2. Barriers to Trade

4. April 2014Econ 455 a) Reasons for Barriers - Autonomous The barrier exists without anyones responsability - Political extortion or retalliation Imposed regardless of economic consequences - Revenue The budget needs financial means - Protectionism The national economy as a whole or industries within are to maintain their competiveness Part I Trade2. Barriers to Trade

5. April 2014Econ 455 b) Non-Tariffary Barriers Lack of information: knowledge about foreign goods, which would normally attract buyers is not available Availability of chickens feet in Kentucky not known about in China Goods which could may have a market in one country but not in another because of taste differences Intestines not appreciated in the US Religious rules forbid the consumption of certain goods Gummi bears – pork or beef gelatine- in India or Muslim countries?

6. April 2014Econ 455 Discrimination Bureaucracy, Slowdown in processing imports Political slogans Buy American, buy British, freedom fries

7. April 2014Econ 455 Boykott and Embargo Boykott: Imports from a certain country will be prohibited, either in total or limited to certain products Embargo: exports to a certain country will be prohibited, either in total or limeted to certain products Motive: Foreign Politics or moral, environmental issues

8. April 2014Econ 455 c) Custom Duties (Tariffs) Tax levied on imports: - Specific tariff constant amount of money per item - Ad valorem tariff percentage of import price (CIF) Original purpose: Revenue for the Government Derivative purpose: influencing imports

9. April 2014Econ 455 Four effects of tariffs to be analized: - Influence on international trade - Influence on domestic production and consumption, - Influence on consumer and producer surplus and - Influence on Government revenue

10. April 2014Econ 455 Two cases to by distinguished: Small country: It is assumed, that the influence between economic variables of the small country and the rest of the world is asymmetric: Economic activities have no influence on the international economy, but the international economy has an influence Two country-case (also Big country-case): Influence of economic variables is symmetrical 4. Custom Duties (Tariffs)

11. April 2014Econ 455 P q S D A small country papa q a = q a d =q a s 4. Custom Duties (Tariffs) Production and Consumption before trade

12. April 2014Econ 455 Consumer and Producer surplus before trade P q S D A small country papa q a = q a d =q a s Consumer surplus Producer surplus

13. April 2014Econ 455 M1M1 P q S D A small country papa qaqa pwpw S+S w qs1qs1 qd1qd1 m1m1 m : quantity of import M : Value of import

14. April 2014Econ 455 P q S D papa qaqa pwpw S+S w qs1qs1 qd1qd1 m1m1 Consumer surplus Producer surplus A small country

15. April 2014Econ 455 P q S D papa qaqa pwpw S+S w qs1qs1 qs2qs2 qd1qd1 qd2qd2 m1m1 t m2m2 p w +t A small country M2M2 Tariff reduces quantitiy and value of imports,

16. April 2014Econ 455 P q S D papa qaqa pwpw S+S w qs1qs1 qs2qs2 qd1qd1 qd2qd2 m1m1 t m2m2 p w +t A small country Consumer surplus Producer surplus

17. April 2014Econ 455 Revenue A historical puzzle: Because of rising US imports federal revenue from tariff duties – a very significant source of revenue for the country - rose. The federal budget showed an unconstitutional surplus. Congress passed legislation to reduce tariffs, the consequence being an even higher budget surplus. What happened? A small country

18. April 2014Econ 455 pwpw Revenue P q S D m0m0 t = 0 Revenue t*m=0 A small country

19. April 2014Econ 455 pwpw Revenue P q S D t1t1 m1m1 A small country

20. April 2014Econ 455 pwpw Revenue P q S D t1t1 m1m1 t2t2 m2m2 A small country

21. April 2014Econ 455 pwpw Revenue P q S D t2t2 m2m2 t3t3 m3m3 A small country

22. April 2014Econ 455 A small country Revenue Solution of the puzzle: Whether a change in the tariff leads to rising or declining revenue from tariffs depends on the combined price elasticities of demand for imports.

23. April 2014Econ 455 A small country Construction of a new diagram to demonstrate solution Gap of D-S = Imports S D D-S National market q Market for Imports m pWpW Gap of D-S = Imports

24. April 2014Econ 455 A small country Import, tariff, and revenue DmDm PWPW m Tariff Revenue m = 1 m < 1 m > 1

25. April 2014Econ 455 A small country Import, tariff, and revenue PWPW m Tariff DmDm m = 1 m < 1 m > 1

26. April 2014Econ 455 A small country Import, tariff, and revenue PWPW m Tariff DmDm m = 1 m < 1 m > 1

27. April 2014Econ 455 A small country Import, tariff, and revenue PWPW m Tariff m = 1 m < 1 m > 1 DmDm

28. April 2014Econ 455 A small country Import, tariff, and revenue PWPW m Tariff DmDm m = 1 m < 1 m > 1

29. April 2014Econ 455 A small country Import, tariff, and revenue PWPW m Tariff DmDm m = 1 m < 1 m > 1

30. April 2014Econ 455 A small country Plotting tariff Against Revenue PWPW m, R t DmDm t

31. April 2014Econ 455 P q S D A small country papa qaqa pwpw S+S w qs1qs1 qd1qd1 Imports 1 p2p2 S+Quota qs2qs2 qd2qd2 Imports 2 Quota d) Import Quotas

32. April 2014Econ 455 Modification: Big country q qaqa S+S w qs1qs1 qs2qs2 qd1qd1 qd2qd2 Imports 1 t PS D papa pwpw p w +t Imports 2

33. April 2014Econ 455 e) Export Subsidies (Small Country) P q S D papa qaqa pwpw D qs1qs1 qd1qd1 x : quantity of export X : Value of export D+x x 1 Absence of subsidies

34. April 2014Econ 455 P q S D papa qaqa pwpw D qs1qs1 qd1qd1 x : quantity of export X : Value of export D+x x 2 Introduction of subsidies (specific) Subs