Trade to GDP Ratio

(Exports+ Imports) / GDP

The ratio does indicate the barriers of trade it only indicates its importance in trade

International Institutions 

Rules and Organizations that govern and constrain behavior

Formal Institutions

Written Sets rules that explicitly state what is and is not allowed. 

Informal Institutions

Customs or traditions that define appropiate behavior, but without legal enforcement.

IMF
International Monetary Fund 

Main concern in macroecnomic stability

International Institutions 

Assist development in non-Industrial economies

Original Purpose: to provide finance mechanisms to rebuild Europe after WWII

Gains From Trade

The improvement in national welfare

How nations maximize their material welfare by specializing in goods and servinces that have the lowest relative cost

OPEC

Oil Producing and Exporting Countries

Taxonomy of institution

Commodity or industry specific organizations

An Inquiry of into the Nature and Causes of Wealth of Nations

Created by Adam Smith, 1776

1st Modern Statement of eceonomic theory 

Attacked mercantilism, 

Proved zero sum wrong

Voluntary exchange is a + sum  bc both nations gain

Ricardian Model

Simple model

Analyzes that a policy of free trade maximizes a nation's material well-being

Assumptions of the Ricardian Model 

Productivity

the amount of output obtained from a unit of input

Labor Productivity

(Units of output)/(hrs worked)

Absolute productivity advantage

The absolute advantage held by a country that produces more of a certain good per hour worked than another

Opportunity Cost

The value of the best forgone alternative to the activity actually chosen

 the value that it requires the economy to move out of its other producton

PPC

Production Possibilities Curve

Curve that shows the trade off a country faces when choosing between two goods. 

Slope= opportunity cost

Autarky

Complete absence of trade

Countries limited to wha they can produce at home

Trade allows coutnry to raise their consumption

CPC

Consumption Possibilities Curve

a curve that is the rate at which the trade can occur 

Comparative Advantage

achieved in a good if a country's opportunity costs are lower than those of the trading partner

The concept is based on the idea that nations maximize their material well-being when they use their resources where they have their highest value.m 

HO Model

• States that a country's factors of production are used to make each good give rise to productivity differences between coutries
• Countries will export goods that require the intensive use of relatively abundant factors to produce, and import goods that require relatively scarce factors to produce

Relative Abundance 

A factor that implies that in autarky its relative cost is less than in countries where it is relatively scarcer.

Relatively Scarce 

A factor in the HO model  that implies that in ataurky resources are more expensive. 

Derived demand

• It is derived indirectly from the demand for the output that is used to produce
• Equal demands for an input
• The amount of income earned per unit of input depends on both the demand for inputs and the supply of inputs 

The Stolper-Samuelson Theorem

• Derived from the HO Model
• An increase in the price of a good raises the income raises the income earmed by factors that are used intensively in its production
• Ultimately, the effects on income of an opening of trade depends on the flexibility of the affected factors

Stolper-Samuelson Therorem

Thoerem that assumes if an input is in high demand , its price is high and the inputs used to produce it receives higher returns

HO Model 

Model that assumes:

1. Multiple inputs-labor, capital, farmland
2. Variations in the quality of inputs

Intraindustry Trade

The international trade of products made within a country

Example: (steel-for-steel or bread-for-bread)

It is growing increasingly important in international trade especially between industrial countries 

Has forced economist to explain why countries often export the same goods they import

Interindustry

International trade of products between two different industries

Example: Bread for steel 

Intraindustry Trade

It is growing increasingly important in international trade especially between industrial countries 

Economies of Scale

Decreasing average costs over a relatively large range of output (as opposed to constant or increasing costs)

They can be either internal or external economies of scale

Internal Economies of Scale 

Are defined as falling average costs over a relatively large range of output

This leads to larger firms bc size confers a competitive advantage in the form of a lower average costs. 

External Economies of Scale

• lead to larger industries
• When firms become more productive as the # of firms in the industry increases
• larger # of producers in an area help create deep labor market and more speciallized skills
• large geo location can lead to dense network of input suppliers

Transparent

Barriers of trade that are obvious

Non-Transparent

Barriers of trade that are hidden

Quotas 

Directly Limit the quantiilty of imports; regulate the quantity of imports

Tarrifs

 Indirect limit on imports; impose a tax on imports

Pt=Pw+t

When tarrifs are imposed

• The consumtion of the imported good subsequently decreases.
• Domestic production rises
• Imports fall

Consumer Surplus 

A value received by consumers in excess of the price they pay (can be measured only in if the demand curve is shown) 

Real savings to consumers 

Q2

Domestic Consumption

Prices, Output and Consumption

Assumptions:

• There is only one price for the good Pw
• Foreign producers are willing to supply us with all the units of the good we want at that price

Imports

Q2-Q1

What domestic producers are not able to meet consumer demand

Q1

Domestic Production

Intellectual Property Rights and trade

Divided into:

• Copy rigths and related rights for literally and artistic work
• Industrial property rights for trade marks
• Patents
• Industrial Design
• Geopraphical indicators
• Layout of integrated circuits

Intellectual Property Rights and trade

Rules for respecting trade

Rules negotiated during the Urugay Rounds with trade related aspects Intellectual Property Rights (TRIPS) agreement

Tarrif Rates in World Major Economies

• Tarrifs are higher in agriculture than in other sectors of the economy
• Overlap between countries in the sectors they protect more rigorously. They tend to be labor intensiver sectors in which high income coutries have lost comparitive advantage. 
• Overall levels of tarrif rates are relatively low, particularly for non-agricultural goods

Logic of Collective Action

• The cost of tarrifs and quotas are borne by a great many people; everyone pay a little for protection
• The benefits of protection is concentrated in a few indsutries: few benefit a lot from protection
• They is an assymetry in the incentives to oppose the policy:those benefiting from protection have greater incentives than those hurt by it to lobby for it. 

Why Nations Protect Their Industries

• Poorer regions rely more on tarrifs as  source of government revenue
• Primary Goal is to generate income for the operation of govt services

Protection in the United States

• Obtained through direct action by the president throught these legal procedures:
• Countervailing duties
• Antidumping duties
• Escape clause relief
• Section 301 retaliation

Countervailing Duties

A tarrif that is granted to a US industry that has been hurt by a foreing country's subsidizing its firms

Subsidies

Antidumping Duties

A tarrif that is levied on an import that is sellling at a price below the product's fair value

Problems: Econ theory and legal definitons are not in agreement

Comparing domestic and foreign prices is diffcult

if coutries do not earn above avg profits it cannot maintain low costs elsewhere

Escape Clause Relief

Section 301

Harmonization Standards 

Two or more coutries adopt a common set of standards

Mutual Recognition Standards

Countries maintain their own standards, but accept the standards of others as vaild and sufficent

Seperate Standards

Countries maintain their own standards and refuse to recognize the standards of others

Obstacles to economic Integration

1. National laws and regulations adopted for strictly domestic reasons limit international commerce in an integrated econ environment
2. Conflict over standards (

International Labor Standards 

1. Prohbition of forced labor
2. Freedom of association
3. the right to organize and bargain collectively
4. an end to exploitation of child labor
5. Nondiscrimination in employment