Reading 19: International trade and Capital Flows (Trade agreements (Free…
Reading 19: International trade and Capital Flows
GDP vs. GNP
Total value of G&S produced within a country border.
Total value of G&S produce by the labor and capital supplied by a country's citizens.
Increase overall economic wellfare.
Countries can specialize production and enjoy economies of scale.
More product variety, competition & efficient allocation of resources.
Losses of domestic industries that lose business to foreign competition.
Unemployment increase when workers are retrained for jobs in expanding industries.
Comparative Vs. Absolute Advantages
A country can produce the goods at lower cost in term of resource relative to another country
The opportunity cost in term of other goods (that could be produced instead) is lower than that of another country.
Ricardian Vs. Heckscher-Ohlin Model of trade
Only one factor of production: Labor.
The source of difference in production costs (and thus comparative advantage) is the
difference in labor productivity due to technology
2 factors of production: Capital & Labor
Source of comparative advantage: differences in relative amount of each factor that each country has.
Trade & capital restrictions
Taxes on imported goods collected by the governent
Limits on the amount of imports allowed over some period.
Minimum Domestic Content
Requirement that some % of product content must be domestic.
Voluntary export restraints
A country voluntarily restricts the amount of exported goods, in order to avoid tariffs or quotas imposed by trading partner.
Export subsidy: decrease export prices and benefit importing country at the expense of the exporting country's government.
Affects of restrictions
Increase prices & decrease quantity of imported goods
Increase demand and quantity supplied of domestic goods
Increase producer surplus and decrease consumer's surplus
Prohibition of foreign investment over certain industries
Outright prohibition of foreigner investment
Prohibition or taxes on income earned on foreign investment by domestic citizens
Restriction on repatriation (sending back earned money) of earnings of foreign entities operating in a country.
Reducing volatilities of domestic asset prices
Maintaining fixed exchange rate
More independence regarding monetary policy
Protecting strategic industry from foreign ownership.
Free Trade Area
All barriers to the import/export of G&S among members are removed.
(Plus) Members also adopt a common set of trade restriction with nonmember.
(Plus) Members also remove all barriers to the movement of labor and capital goods among members.
(Plus) Members also establish common institution and economic policy for the union
(Plus) Members also adopt a single currency
Balance of payment
Any surplus (deficit) in current account must be offset by a deficit (surplus) in the capital and financial accounts.
Import / Export of G&S
Foreign earnings from stock dividend or debt interest
Unilateral transfers (Money from domestic citizen working abroad, direct foreign aid)
Purchase/ sale of fixed assets
Purchase/ sale of non-financial assets (Rights to natural resource, copyrights, trademark, lease, etc.)
Foreign-owned asset in the country, domestic government and corporate securities, direct investment in the countries and domestic currency.
Government-owned foreign assets, direct investment in foreign country and claim against foreign banks.
How consumers, firms, and government affect?
Export - Import = Private savings + Government savings - Domestic investment
When total savings < domestic investment, export must be less than import
Lower private savings, larger Gov deficit and high-rate of domestic investment --> increase current account deficit.
World Bank, IMF and WTO
Provide low-interest-rate loans, interest-free credits and grants to developing countries
Provide resources and knowledge and help forming private/ public partnerships with overall goals of fighting poverty
Facilitate trade by promoting international monetary cooperation and exchange rate stability
Assist setting up international payment systems
Make resource available to member countries with balance of payment problems
Ensure that trade flows freely and works smoothly
Instituting, interpreting and enforcing multilateral trade agreements that detail global trade policies.