Term
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Definition
-Differences in PRODUCTIVITY OF LABOR between countries causes productive differences, leading to gains from trade
-Differences in productivity usually because of differences in technology
-COMPARATIVE ADVANTAGE
-Productivity differences cause wage differences
-Relative wages lie between ration of productivities in each industry |
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-Effects on income distribution
-Mobile factor (labor) vs. Specific Factors (capital and land)
-Wage rate must be the same in both sectors because labor is freely mobile
-Source of international trade is difference in relative supply
-International trade leads to a convergence of RELATIVE prices |
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Definition
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| Stolper- Samuelson Theorem |
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Definition
If the relative price of a good increases, then the real wage or rate of return of the factor used intensively in the production of that good increases, while the real wage or rate of return of the other factor
Example: as Pc/Pf increases, w/r increases
-See graph |
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Term
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Definition
Holding output prices constant, as a factor of production increases then the supply of the good that uses this factor intensively increases and the supply of the other good decreases
Example: If labor increases, supply of cloth increases and supply of food decreases |
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Definition
An economy will export goods that are intensive in its abundant factors of production and import goods that are intensive in its scarce factors of production
Trade owners of abundant factors gain, but owners of scarce factors lose |
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Definition
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Term
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Definition
Import taxes calculated as a fixed charge for each unit of imported goods
Example: $.05/ gallon of gas |
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Definition
| Import taxes calculated as a fraction of the value of the imported goods |
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Term
| Effective Rate of Protection*** |
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Definition
Protection given by the tariff to domestic value added
EXAMPLE: |
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Definition
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Term
| External Economies of Scale |
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Definition
| -Cost per unit falls as the industry grows larger |
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Term
| Internal economies of scale |
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Definition
| -Cost per unit as the average firm grows larger |
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| Increasing Returns to Scale |
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Definition
| -Output more than doubles when all inputs are doubled |
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Term
| Collective Action problem |
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Definition
| Trade policy often imposes harm on large numbers of people and benefits only a few |
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Term
| Foreign Direct Investment (FDI) |
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Definition
| Outright construction of purchase abroad of productive facilities by domestic residents |
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Term
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Definition
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Term
| Role of President in US trade policy |
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Definition
-Right to make treaties
-1974 trade act
-Fast Track authority- must be renewed |
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Term
| Role of Congress in US trade policy |
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Definition
-Commerce Clause
-Legislation must be approved in both houses before it can go to President
-Any member can introduce legislation
-Usually referred to a committee (House Ways and Means Committee and Senate Finance committee) |
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Term
| House Ways and Means Committee |
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Definition
-Wide jurisdiction over issues: Medicare, Social Security reform, Bush tax cuts, trade agreements (NAFTA and CAFTA)
-Chairman: Charlie Rangel
-Ranking Republican: Jim McCrery |
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Definition
-Similar to House Ways and Means Committee except has jurisdiction over both Medicare and Medicaid
-Chairman: Max Baucus
-Ranking Member: Charles Grassley |
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Definition
-Part of executive office of president
-responsible for developing and coordinating US international trade, commodity, and direct investment policy and overseeing negotiations with outer countries
-US trade rep: Susan Schwab
-Resolves disagreements, frame issues for presidential decision
-US Trade rep also serves as a vice-chairman of OPIC and nonvoting member of Export-Import Bank and member of National Advisory Council on International Monetary and Financial policies |
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| Impact of Trade Agreements on US economy*** |
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Definition
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Term
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Definition
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Term
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Definition
-Firms that invest in new technology generally create knowledge that other firms can use without paying for it
-Creating an extra benefit for society
-Example of an externality: marginal social benefit of investment is not represented by producer surplus |
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| Should governments subsidize high technology industries? *** |
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Definition
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Term
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Definition
-Profits generated by imperfectly competitive industries that are typically dominated by a few firms
-Profits above what equally risky investments elsewhere in the economy can earn
-EXAMPLE: Boeing vs. Airbus |
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Definition
-Boeing vs. Airbus
-Each firm's profits depends on the actions of the other
-Predicted outcome depends on which firm invests/produces first
-Subsidy can make it profitable for one of the firms to producer no matter what |
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Definition
| A government policy to give a domestic firm a strategic advantage in production |
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| Critiques of the Brander-Spencer Analysis |
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Definition
1. Requires more information about firms than is likely available
2. Risks foreign retaliation
3. Could be manipulated by politically powerful groups |
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Definition
-Mexican firms that produce for export to the US
-Argument against free trade: low wages and poor working conditions
-Ricardian model: wages should rise compared to pre-trade level
-H-O model: unskilled workers in Mexico should gain
-Evidence: wages in maquiladora sectors have risen relative to wages in other Mexican sectors |
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Definition
Use tariffs or import quotas as temporary measures to get industrialization started
-US, Germany and Japan all used trade barriers to help foster industrialization |
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| Market Failure Justifications for Infant Industry protection |
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Definition
-Imperfect Capital Markets
-Problem of Appropriability |
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Term
| Import Substituting Industrialization |
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Definition
Strategy of encouraging domestic industry by limiting imports of manufactured goods (via trade restrictions such as tariffs and quotas)
-Popular in 1950s and 1960s
-Final stages of industry protected first
-Sophisticated manufactured goods usually still imported
Examples: India and Latin America |
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Term
| Problems with Import-Substituting Industrialization |
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Definition
-Distortion of incentives
-Promoting production at an inefficiently small scale
-Aggravation of other problems such as income inequality and unemployment |
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Term
| Effects of Trade Liberalization |
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Definition
1. Dramatic increase in the volume of trade
2. Change in the nature of trade: share of manufactured goods in developing country exports has surged |
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Term
| Export Oriented Industrialization |
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Definition
-Exports of manufactured goods primarily to advanced nations
-Another possible path to industrialization
-East Asian Miracle |
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Term
| High Performance Asian Economies (HPAEs) |
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Definition
-Achieved spectacular economic growth- sometimes at rates higher than 10%
-Severely affected by financial crisis of 1997
-Different interpretations on the role of government policies in fostering economic growth |
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Definition
-Rapid growth soon after WWII
-Per capita income now similar to US and Western Europe |
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Definition
-Hong Kong, Taiwan, South Korea and Singapore
-Average 8-9 growth rate from mid 1960s until 1997 financial crisis |
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Definition
-Malaysia, Thailand, Indonesia and China
-China: more than 10% growth |
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| Trade Policy in the HPAEs |
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Definition
-Outward oriented trade policy
-Trade freer than in developing countries that have employed import substitution policies |
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Definition
-Unclear extent of free trade policies in growth
-Many HPAEs have in fact not had anything very close to free trade (except Hong Kong)
Correlation between rapid growth in exports and rapid overall economic growth but correlation does not imply causation |
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Term
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Definition
Price of exports/Price of imports
-Price of exports increase: Increase in terms of trade
-Price of imports decrease: increase in terms of trade |
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