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Theory Review. Global Trade and Finance. Our Market International Trade ROW Market. US S. US D. Exports. ROW Sx. ROW S. Imports. US Dm. ROW D. Classical trade theory. Smith-Ricardo, Heckscher -Ohlin, Stolper Samuelson - PowerPoint PPT Presentation
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Theory ReviewTheory Review
Global Trade and FinanceGlobal Trade and Finance
Our Market International Trade ROW Market
Imports
ExportsROW Sx
US Dm
ROW D
ROW S
US SUS D
Classical trade theory. Smith-Ricardo, Classical trade theory. Smith-Ricardo, Heckscher -Ohlin, Stolper SamuelsonHeckscher -Ohlin, Stolper Samuelson
How to trade beyond the Production-How to trade beyond the Production-Possibilities CurvePossibilities Curve
Trading along TT’, the UK and SA can consume outside their PPC.
England South Africa.
.
..T
T’
T
T’.C .
Social choice (the CIC) will determine whether the UK and SA will consume at C or D.
CICCIC
Review Characteristics of Review Characteristics of MarketsMarkets
Pure Comp?Pure Comp?Ease of entry, no L-R pure NR, many Ease of entry, no L-R pure NR, many
sellers, no differentiationsellers, no differentiation
Review Characteristics of Review Characteristics of MarketsMarkets
Monopoly?Monopoly?Single seller, first-mover econs of scale or Single seller, first-mover econs of scale or
barriers (barriers (e.g., a franchise)e.g., a franchise), regulation , regulation usual.usual.
Review Characteristics of Review Characteristics of MarketsMarkets
Oligopoly?Oligopoly?Few sellers, interdependence, policy Few sellers, interdependence, policy
uncertainty, struggle for market share, uncertainty, struggle for market share, differentiation, non-price competition.differentiation, non-price competition.
Review Characteristics of Review Characteristics of MarketsMarkets
Monopolistic competition?Monopolistic competition?Ease of entry so no L-R pure NR, unless Ease of entry so no L-R pure NR, unless
entry limited through licensing, entry limited through licensing, differentiation to tilt D curve down, differentiation to tilt D curve down, appeal to preferencesappeal to preferences
Review Characteristics of Review Characteristics of MarketsMarkets
Ease of EntryEase of Entry ?? PC,PC, MC MC
Product Differentiation?Product Differentiation? MC,MC, OligOlig
Interdependence and uncertainty?Interdependence and uncertainty?OligopolyOligopoly
No interdependence?No interdependence?(No bus policy interaction) in MC(No bus policy interaction) in MC
Profitability “slack”, even in long term?Profitability “slack”, even in long term? Monop, Olig, Licensed MCMonop, Olig, Licensed MC
Modern Trade TheoryModern Trade TheoryCompare modern and classical Compare modern and classical
theoriestheories
What role did international trade What role did international trade theory play in the classical theory play in the classical perception of the domestic economy?perception of the domestic economy?
Was this realistic?Was this realistic?In Britain?In Britain?In the U.S.?In the U.S.?
Classical Trade TheoryClassical Trade Theory
Pure CompetitionPure Competition
Trade Sector on peripheryTrade Sector on peripheryPursuit of comparative advantagePursuit of comparative advantagewith inter-industry tradewith inter-industry trade
Domestic MarketsDomestic Markets
Why did the modern theory develop?Why did the modern theory develop?What are it’s two pillars?What are it’s two pillars?
Global marketsGlobal marketsA role for governmentA role for government
Classical TheoryClassical Theory
Pure CompetitionPure Competition Economies of (trade Economies of (trade assumption)assumption) ScaleScale
Natural (domestic) Natural (domestic) monopoliesmonopolies
RegulationRegulationTrade Sector onTrade Sector onPeripheryPeriphery
GlobalGlobalMarketsMarkets
Domestic MarketsDomestic Markets
What did Krugman see as the What did Krugman see as the possibilities for government possibilities for government intervention?intervention?
Modern TheoryModern Theory
Economies of ScaleEconomies of Scale
““Productive” (?) possibilitiesProductive” (?) possibilities
for government interventionfor government intervention1. Optimal Tariffs1. Optimal Tariffs
2. Supporting Investments/2. Supporting Investments/
Promoting exportsPromoting exports
Global MarketsGlobal Markets
Monopolistic CompetitionMonopolistic Competition
OligopolyOligopoly
MonopolyMonopoly
One more time, what is intra-industry One more time, what is intra-industry trade?trade?
How do you calculate it?How do you calculate it?
Two-way trade = IITTwo-way trade = IIT
Total trade = IIT + Inter-industry Total trade = IIT + Inter-industry tradetrade
IIT = 1 - sum of |X-M| sum of X + M
X $100 mil perfume, M $50 mil.X $100 mil perfume, M $50 mil.IIT = 1 – (50/150) = 1 – 0.33 = .66IIT = 1 – (50/150) = 1 – 0.33 = .66
One more time, what is intra-industry One more time, what is intra-industry trade?trade?
How do you calculate it?How do you calculate it?Two-way trade = IITTwo-way trade = IITTotal trade = IIT + Inter-industry Total trade = IIT + Inter-industry
tradetrade
IIT = 1 - sum of |X-M| sum of X + M
M $60 b cars, X $40 bM $60 b cars, X $40 bIIT = 1 – (20/100) = 1 – 0.2 = .80IIT = 1 – (20/100) = 1 – 0.2 = .80
Why has it grown?Why has it grown?
Global MarketsGlobal Markets
Growth of intra-industry Growth of intra-industry tradetrade
A response to preferencesA response to preferences
expressed in international expressed in international tradetrade
demands.demands.
Monopolistic CompetitionMonopolistic Competition
OligopolyOligopoly
MonopolyMonopoly
Trade Policy: Tariffs (normal and Trade Policy: Tariffs (normal and optimal), Quotas, and VERs.optimal), Quotas, and VERs.
A quota is much like a tariff. C represents internal redistribution from the consumer to whomever gets the import licenses.
P
Q
Sd
Sd plus quota
PD w/ quota
PROW
Dd
a b d
S1 D1S0 D0
a = Change from CS to PS
b = “Production effect”
c = Quota rents
d = “Consumption effect”
c
Show the idea of VERs.