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Summary Economics 244 international trade part 1
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Economics 244International Trade
Learning Outcomes
1. Understand the current economic conditions and the implications for economic growth
concepts
2. Gain insight from International trade theories that explain why international trade matters
3. Understand why, how and to what extent governments intervene in international trade
4. Understand the multilateral global trading system and how it advances trade amongst
countries
5. Understand regional integration, its purpose and possibilities and obstacles
6. Use the insight from theory to understand how the confluence of freer trade under the
World Trade Organization’s Trade Facilitation Agreement, the African Continental Free Trade
Agreement and the Fourth Industrial Revolution can propel Africa into economic prosperity
Growth During Covid-19
World Trade fell sharply in the first half of 2020 as the COVID-19 pandemic up ended the global
economy. However, rapid government responses helped temper the contraction, and WTO
economists believe that while trade volumes will register a steep decline in 2020, they are unlikely to
reach the worst-case scenario projected in April.
The WTO Set out two plausible paths: the optimistic scenario, in which the volume of the world
merchandise trade in 2020 would contract by 13%, and a pessimistic scenario in which it would fall
by 32%. Future trade expansion could fall short due to adverse developments [such as a second
wave of COVID-19].
Policy decisions have been critical in softening the ongoing blow to output and trade, and they will
continue to play an important role in determining the place of economic recovery. For output and
trade to rebound strongly in 2021, fiscal, monetary and trade policies will need to keep pulling in the
same direction. While many industries have shown strong rebounds in the past weeks, it is
important to note that these rebounds follow historic, or near historic declines, and will need to be
carefully monitored before drawing any definite conclusions about the recovery.
The outlook for the global economy over the next two years remains highly uncertain. This is
reflected in the range of GDP estimates from other international organizations, in some cases relying
on multiple scenarios. The World Bank, OECD, and IMF have all released forecasts showing
significant slowdowns in global trade and GDP; All are broadly consistent worth the World Trade
Organization's forecast for the current year. All the estimates imply a less negative trade response to
declining GDP growth than was observed in the global financial crisis of 2008 to 2009.
There are several reasons as to why trade would respond less to changes in GDP than it did during
the financial crisis in 2008. Firstly, fiscal and monetary policies have arguably been rolled out more
quickly and on a much larger scale in the current crisis than was done in 2008. The WTO forecast
scenarios did not include an attempt to model either set of policy responses, since, at the time, these
policies were just being introduced.
Secondly, income support to households and expectations that the pandemic would eventually ease
may have encouraged consumers to maintain consumption levels at a higher level than expected.
Lastly, much of the decline in output has been concentrated in non-tradable services, such as
hospitality, personal services and entertainment, which tend to be less import-intensive than
manufacturing.
,Part 1:
Why does International Trade Matter?
Theory of international trade timeline:
international trade is the exchange of capital goods and services across international borders or
territories. International trade has led to significant economic prosperity, although unevenly spread
across the globe. Economic prosperity through trade arises from:
1. the exploitation of competitive advantage - trading partners reap mutual gains when each
nation specializes and goods for which it holds comparative advantage and then engages in
trade for other products
2. gains from specialization - higher production volumes provide further cost benefits in terms
of economies of scale
3. increased competition which lowers world process and promotes efficiency
4. the breakdown of domestic monopolies
5. the potential increase in the variety and quality of goods and services
6. employment, given that employment is closely related to production
Adam Smith, the father of economics, spent much of his time arguing against the Mercantilist
theory.
Mercantilism: 1500 – 1700
Mercantilism is the first theory of international trade and it underlies the desire to build a
prosperous and powerful state. Mercantilists believed that the wealth of the nation was measured
by how much currency, which was gold and silver in late on, the National Treasury had. Exports were
seen to be good because foreign nations would pay for their goods, bringing silver and gold into
their nation . However imports, on the other hand meant that gold and silver would leave their
country in order pay for goods coming in, and it was decided that imports should thus be limited.
The mercantilists we're very powerful class and we're able to influence government policies allowing
them to achieve their goal to restrict imports. This was done by imposing strict government controls
and regulations on trade, Commerce and economic activities. The restrictive economic policies
imposed included:
high tariffs, especially on manufactured goods
export subsidies
limiting wagers
exclusive trade with colonies
maximizing the use of domestic resources
government support of new industries through the provision of capital and tax benefits
the establishment of monopolies with the local and colonial market.
The government would also provide grind titles and pensions to successful producers.
Features of a mercantilist economy
1. imports of certain goods were restricted through government policies
2. the government prioritized export industries through the provision of subsidies
3. policies of nationalism were imposed
4. wealth was measured in gold and silver, and private accumulation, use or export of precious
material was prohibited
5. promotion of one-way trade with colonies an importation of precious metals from a trading
partner
, Assumptions about mercantilism
1. there's a finite amount of wealth in the world
2. a nation should have a positive balance of trade by exporting more than its imports
3. a nation can only grow rich at the expense of other nations, therefore trade is a zero-sum
game
The view of trade as a zero-sum game not only encouraged the adoption of complex government
trade restrictions, which raised prices and stunted the growth and freedom of businesses, but it also
ignited the conflict between trading parties and colonies in some instances. While the decline of
mercantilism can be linked to the rise of the laissez-faire doctrine of free market economics, it is the
publication of Adam Smith's “The Wealth of Nations” that was generally thought to mark the end of
the mercantilist era. Adam Smith coined the term “mercantile system” To describe the system of
political economy that sought to enrich the country by restraining imports and encouraging exports.
Adam’s Absolute Advantage: 1776
Adam Smith's “An inquiry into the nature and causes of the wealth of nations” installed him as one
of the most influential figures in the development of economic theory. Smith challenged the
mercantilist idea that national wealth was reflected in the countries Holdings of precious metals by
convincingly arguing that national wealth was reflected in a nation's productive capacity rather than
the stock of gold and silver (money).
Moreover, growth in productive capacity was fostered best in an environment where individuals are
free to pursue their self-interest. Self-interest, in tone, would lead individuals to specialize in and
exchange of goods and services based on their special abilities. Thus, gains are acquired through
division and specialization of Labor.
Adam Smith and the division of Labor
keep in mind that Adam Smith is from the 1770s. This was known as the beginning of the first
industrial revolution. Factory processes that, to us, or well-known were novelty in his day. One day
he visited a pin factory and what he saw there led him to formulate the concepts of division of Labor
and specialization that have stood the test of time for more than 200 years. He goes on to explain
how breaking a process up into smaller steps and learning to execute those steps very well through
learning, practice and specialization boost productivity. It is indisputable how this story plays today.
Smith advocated laissez-faire as he saw a little need for government control. He objected to the
merchant la system that enabled powerful merchants to enrich themselves through government
favor in the form of monopoly concessions and other privileges, while contributing nothing to the
general welfare society. Smith pointed out that government policies that favor one industry take
away resources from another industry who they might have been more gainfully employed. Smith
applied the principles of division of Labor and socialization to international trade where he explains
that in a setting where individuals can pursue their self-interest, countries would specialize in an
export goods in which they have an absolute advantage.
Absolute advantage theory
Adam Smith described absolute advantage as a particular country's capability to produce more of a
commodity at a lower cost (with less input) than its competitors could. Absolute advantage is
achieved through low-cost production , an in Adam Smith theory, there fish and see that leads to
lower costs is linked to the division of Labor and specialization. The theory is based on the following
assumptions:
1. A two-country and two commodity model are applied
2. labor is the only factor of production thus only input or production cost is taken into account
3. labor is homogeneous and mobile within a country but immobile between countries
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