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International tradeChapter 1
Gains from trade
Countries selling goods and services to each other almost always generates mutual benefits
1) When a buyer and a seller engage in a voluntary transaction, both can be made better off.
- Norwegian consumers import oranges that they would have hard time producing
2) How could a country that is the most ( least) efficient producer of everything gain from
trade?
- Countries use finite resources to produce what most productive at ( compared to
their other production choices), then trade those products for what they want to
consume
3) Countries can specialize in production, while consuming many goods and services through
trade. Trade allows specialization ( technological)
4) Trade benefits countries by allowing them to export goods made with relative abundant
resources and import goods made with relatively scarce resources. Not every country have
the same climate and resources
5) When countries specialize, they may be more efficient due to larger-scale production
6) Countries may also gain by trading current resources for future resources ( international
borrowing and lending) and due to international migration
Trade is predicted to benefit countries as a whole, but trade may harm particular groups within a
country.
- International trade can harm the owner of resources that are used relatively
intensively in industries that compete with imports
- Trade may therefore affect the distribution of income within a country
Pattern of trade describes who sells what to whom ( origin – product - destination)
- Differences in climate and resources explain why Brazil export coffee and Saudi
Arabia export oil.
- But why does Japan export automobiles, while the U.S. exports aircraft?
Cars are being imported and exported, that is because of different tastes of
people product differentiating
Why some countries export certain products can stem from differences in:
- Labor productivity
- Relative supplies of capital, labor and land and their use in the production of
different foods and services
Effects of government policies on trade
Policy makers affect the amount of trade trough:
- Tariffs: a tax on imports or exports
- Quotas: a quantity restriction on import or exports
- Export subsidies: a payment to producers that export
- Through other regulations ( product specifications) that exclude foreign products
from the market, but still allow domestic products
Exchange rates measure how much domestic currency can be exchanged for foreign currency and
thus affect how much:
- Goods denominated in foreign currency ( imports) cost in the domestic country
- Goods denominated in domestic currency ( exports) cost in foreign markets
, Chapter 2
The 5 largest trading partners with the U.S. in 2015 were China, Canada, Mexico, Japan, and
Germany. What matters?
- Economic size
- Proximity ( nabijheid)
Size matters: The gravity model ( two economics that are large attracts each other)
- 3 of the top 10 trading partners with the U.S. in 2012 were also the 3 largest
European economies: Germany, the United Kingdom, and France
Why does the United States trade more with these European countries than with others?
- These countries have the largest gross domestic product (GDP), the value of
goods and services produced in an economy, in Europe.
- Each European country’s share of U.S. trade with Europe is roughly equal to its
share of European GDP
Shows the correspondence between the size of different European
economies and those countries’ trade with the United States.
If you are larger in economic size, you trade more with the U.S.
Netherlands have a port ( haven) so are more important and are
above the line.
The size of an economy is directly related to the volume of imports and exports.
- Larger economies produce more goods and services, so they have more to sell in
the export market.
- Larger economies generate more income from the goods and services sold, so
they are able to buy more imports.
Trade between any two countries is larger, the larger either of the countries are.
Distance = travel distance that the products
makes
,Impediments to trade: Distance, Barriers, and borders
Other things besides size matter for trade:
1) Distance between markets influences transportation costs and therefore the cost of imports
and exports.
2) Cultural affinity: close cultural ties, such as a common language, usually lead to strong
economic ties.
3) Geography: ocean harbors and a lack of mountain barriers make transportation and trade
easier.
4) Multinational corporations: corporations spread across different nations import and export
many goods between their divisions.
5) Borders: crossing borders involves formalities that take time, often different currencies need
to be exchanged, and perhaps monetary costs like tariffs reduce trade.
Trade agreements between countries are intended to reduce the formalities and tariffs needed to
cross borders, and therefore to increase trade.
The negative effect of distance on trade according to the gravity models is significant, but has grown
smaller over time due to modern transportation and communication. (automobiles, telephones,
airplanes, computers, fax machines, Internet)
Political factors, such as wars, can change trade patterns much more than innovations in
transportation and communication.
Vertical disintegration of production has contributed to the rise in the value of world trade through
extensive cross-shipping of components.
- A $100 product can give rise to $200 or $300 worth of international trade flows.
- Every part that has to be shipped comes with extra cost.
What kinds of products do nations trade now?
Most (about 57%) of the volume of trade today is in manufactured products such as automobiles,
computers, and clothing.
- Services such as shipping, insurance, legal fees, and spending by tourists account
for about 24% of the volume of trade.
- Mineral products (ex., petroleum, coal, copper) remain an important part of
world trade at 12%
- Agricultural products are a relatively small part of trade at 8%.
Low- and middle-income countries have also changed the composition of their trade.
- In 2001, about 65% of exports from low- and middle income countries were
manufactured products, and only 10% of exports were agricultural products.
- In 1960, about 58% of exports from low- and middle income countries were
agricultural products and only 12% of exports were manufactured products.
Service outsourcing (or offshoring) occurs when a firm that provides services moves its operations to
a foreign location.
- Service outsourcing can occur for services that can be transmitted electronically.
o A firm may move its customer service centers whose telephone calls can
be transmitted electronically to a foreign location.
o Send to places where it is cheaper
o Not all services lend themselves to being performed remotely
,Summary
1) The 5 largest trading partners with the U.S. are China, Canada, Mexico, Japan, and Germany.
2) The largest economies in the EU undertake the largest fraction of the total trade between
the EU and the U.S.
3) The gravity model predicts that the volume of trade is directly related to the GDP of each
trading partner and is inversely related to the distance between them.
4) Besides size and distance, culture, geography, multinational corporations, and the existence
of borders influence trade.
5) Modern transportation and communication have increased trade, but political factors have
influenced trade more in history.
6) Today, most trade is in manufactured goods, while historically agricultural and mineral
products made up most of trade.
Chapter 3
Differences across countries are a key reason why trade occurs:
- The Ricardian model examines differences in the productivity of labor (due to
differences in technology) between countries.
- The Specific Factors model (Chapter 4) and the Heckscher-Ohlin model (Chapter
5) examine differences in labor, labor skills, physical capital, land, or other factors
of production between countries.
Trade may also arise due to economies of scale (larger scale of production is more efficient)
The concept of comparative advantage
The opportunity cost of producing something measures the cost of not being able to produce
something else with the resources used.
Comparative advantage will be determined by comparing opportunity costs across countries.
A simple example with roses and computers explains the intuition behind the concepts of
opportunity cost and comparative advantage in the Ricardian model.
For example, suppose a limited number of workers could produce either roses or computers.
- The opportunity cost of producing computers is the amount of roses not
produced.
- The opportunity cost of producing roses is the amount of computers not
produced.
Suppose that in the United States 10 million roses could be produced with the same resources as
100,000 computers.
Suppose that in Colombia 10 million roses could be produced with the same resources as 30,000
computers.
- Colombia has a lower opportunity cost of producing roses: has to stop producing
fewer computers in order to free up resources to make a rose.
- Similarly, the US has a lower opportunity cost of producing computers.
A country has a comparative advantage in producing a good if the opportunity cost of producing that
good is lower in the country than in other countries.
- The United States has a comparative advantage in computer production.
- Colombia has a comparative advantage in rose production.
Suppose initially that
- Colombia produces only computers: 30.000.
- the US produces only roses: 10 million.
, - both countries want to consume computers and roses.
Can both countries be made better off?
- Yes, If they specialize in their comparative advantage! So US produces computers
and Colombia roses.
When countries specialize in production in which they have a comparative advantage, more goods
and services can be produced and consumed.
A One-Factor Economy
We formalize these ideas by constructing a one-factor Ricardian model using the following
assumptions:
1) Labor is the only factor of production.
2) Labor productivity varies across countries due to differences in technology, but labor
productivity in each country is constant.
3) The supply of labor in each country is constant.
4) Two goods: wine and cheese.
5) Competition allows workers to be paid a wage equal to the value of what they produce, and
allows them to work in the industry that pays the highest wage.
6) Two countries: home and foreign.
A unit labor requirement indicates the constant number of hours of labor required to produce one
unit of output.
- aLC is the unit labor requirement for cheese in the home country. a LC hours of
labor produce one pound of cheese in the home country.
- aLW is the unit labor requirement for wine in the home country. a LW hours of labor
produce one gallon of wine in the home country.
A high unit labor requirement means low labor productivity.
- Labor productivity is how much output one hour of labor creates.
Labor supply L indicates the total amount of labor resources − the number of hours worked (a
constant parameter).
Cheese production QC indicates how many total pounds of cheese that the home country produces.
Wine production QW indicates how many total gallons of wine that the home country produces.
Closed economy
Production possibilities
The production possibility frontier (PPF) of an economy shows the maximum amount of a goods that
can be produced for a fixed amount of resources.
The production possibility frontier of the home economy is: a LCQC + aLWQW ≤ L
The maximum home cheese production is
The maximum home wine production is
For example, suppose that the home economy’s labor supply is 1,000 hours.
- aLC= 1 hours/lb, so 1 hour of labor produces one pound of cheese in the home
country.
- aLW = 2 hours/gallon, so 2 hours of labor produces one gallon of wine in the
home country.
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