Graphs for International Economics PDF

Preview

Summary

Download Graphs for International Economics PDF

Description

GRAPHS FOR INTERNATIONAL ECONOMICS Why Trade? Production possibilities in the economy

Social Indifference Curves

Characterising the closed economy: consume only what you produce

What happens with globalisation?

consumption

Trade

Gains from trade: exchange and specialisation

A two-country world

Specific Factors

Model Capital fixed in short term

Characterising the specific factors model

But suppose relative prices change (say only the price of A…remember why this is the impact of openness) - Price A increases - Price B is unchanged - Labour demand for A increases

-

-

Change in prices of A greater than change in wages Change in wages is greater than change in prices of b

Income distribution effects Expanding sector gains Cannot unambiguously determine if labour is better off

Ricardian Comparative Advantage

Gains from trade

relationship between relative wages and relative productivity can be drawn on a diagram

Technological change in a foreign country – country specialises in broader range of goods

what would happen if there was immigration into the home country?

Hecksher-Ohlin Building blocks for understanding the H-OS model. How much of each good produced depends on the relative factor price line: w/r

An Edgeworth Box

Each country will export the good which is intensive in the factor which the country possesses in relative abundance

Trade leads to factor price equalisation when specialisation is incomplete

Stolper-Samuelson Theorem Rewards to the relatively abundant factor increases in the presence of trade.

China’s accession on unskilled workers in the US

what would happen to wages in China

Rybczinski Theorem

New Trade Theory The CC Schedule

The PP Schedule

Autarky the size of the market is S1 in country 1 and S2 in country 2

Trade the size of the market is S1+S2.

The effect of trade Market size increases Intra-industry trade Lower prices More varieties available Firms sell at lower cost Scale matters

Heterogenous Firms

Firms are Different!some will export, some will not

Operating Profit

Low-cost firm

High-cost firm

What happens to domestic only firms? Can new exporters emerge?

International

Organisation Ym is an isoquant; the production frontier relates to the firm/industry not the country. Suppose the price of the unskilled intensive input Y1 falls (e.g. fall in transport costs, country opening up to foreign investors).

Trade Policy Effect of a tariff: partial equilibrium/small country effects Increases domestic prices, reduces imports Leads to higher output in the domestic industry Reduces consumption Increases producer surplus by area a Reduces consumer surplus by area: a+b+c+d Increases government revenue by area c So net change in welfare is: (a)-(a+b+c+d)+(c)=-(b+d) These two deadweight loss triangles are known as the efficiency losses

Effect of a tariff: partial equilibrium/large country effects • • • • • • • •

Imports fall, prices rise Domestic output increases, consumption falls Producer surplus increases by a Consumer surplus decreases by (a+b+c+d) But world prices fall-this is the “terms of trade” effect. Tax revenue is (c+e) So, overall effect is: (a)-(a+b+c+d)+(c+e)=e(b+d)

Effect of a tariff: small country/general equilibrium

Effect of a tariff: large country/general equilibrium Large country/general equilibrium-what’s the difference from the small country case? …protection raises domestic prices for A but reduces world market prices for A so RPw becomes steeper Comparison welfare losses in the large country case are lower because of the terms of trade effect

Comparison of alternative trade policy instruments: small country/perfect competition

Preferential Trade Agreements Welfare Effects: Unilateral Trade Liberalisation (start high) Tariffs reduced to Pt’ -: Change in Producer Surplus=(-a) -: Change in Consumer Surplus=a+b+c -: Net Change=b+c Adding in the trade effect and the impact of tariffs on imports Q1-Q2, add on tariff revenue equal to e+f

Welfare Effects: Unilateral Trade Liberalisation (start lower) Reduction in Tariffs to Pt’ -: Change in Producer Surplus=(-a) -: Change in Consumer Surplus=(a+b+c+d) -: Change in Tariff Revenue=(f+g+e-cg=f+e-c) -: Net Change in Welfare:=(b+d+f+e) Welfare Effects: Preferential Trade Liberalisation Customs Union Starting Case: Tariffs ‘so’ High, Imports are zero: Partner Country Has Tariffs so its prices are above world market prices The partner countries reduce tariffs between each other but apply the Common External Tariff against non-partner countries - Imports from partner countries increase to Q1-Q2

Welfare Effects: Preferential Trade Liberalisation Customs Union Starting Case: Tariffs Not ‘so’ High, Imports are Positive to Start With Home Country already imports Q1-Q2 but from world market -In this case, government would obtain tariff revenue equal to c Partner country also has tariffs but lower than the home country When home and partner establish a customs union, the Common External Tariff is set between the two initial tariff levels Welfare Effects: Preferential Trade Liberalisation Free Trade Area Partner country also has tariffs but lower than the home country when home and partner establish a free trade area, there is no Common External tariff set between the two initial tariff levels If there is free trade between these two countries, prices in the home country have the potential to fall to Ptp This creates trade creation equal to ‘a’

and ‘b’ and trade diversion equal to ‘c’ How does this compare with the customs union case?...