Global 2

Global Test 2

Mercantilism

• Advocates that countries should simultaneously encourage exports and discourage imports

Adam Smith

• Theory of absolute advantage• Explained why unrestricted free trade is

beneficial to a country• Wealth of Nations• 1776

Free Trade

• Where government doesn’t attempt to influence through quotas or duties what its citizens can buy from another country, or sell to another country

David Ricardo

• Theory of comparative advantage

New Trade Theory

• In some cases countries specialize in the production and export of particular products because certain industries can only support a limited number of firms

0-sum game

• Situation in which an economic gain by one country results in an economic loss by another

• Mercantilism assumed this was the case.• You sell more than you buy, your country gains

and another country gets poorer. Doesn’t work like that in reality

Positive – sum game

• Situation where all countries can benefit

Absolute Advantage

• When one country is more efficient at producing something than any other country

Comparative Advantage

• A can either produce 20 cocoa or 15 rice, while B can produce 5 cocoa or 7 rice.

• B has the comparative advantage for rice• It is a measure of productivity

Samuelson Critique

• 20% cheaper groceries doesn’t necessarily make up for wage losses in America

Heckscher-Ohlin theory

• Comparative advantage arises from differences in national factor endowments, not productivity

• Factor Endowments – extend to which a country is endowed with resources like land, labor, and capital

Leontief Paradox

• Goes against the H-O theory• The U.S. is very high in capital, so according to

the H-O theory their exports should be very capital intensive and imports more labor intensive

• Yet in reality, U.S. imports are more capital intensive than its exports

Product Life Cycle Theory

• United states starts as exporter of new product because initial demand is not based on price

• Later more people produce it, demand based on price, production begins in countries that can do it cheaper

• United states imports it from cheaper countries

Economies of Scale

• Cost advantage associated with large-scale production

• Spreading fixed costs by producing a ton of units

First-Mover Advantages

• Economic and strategic advantages that accrue to early entrants into an industry

Porters Diamond

• Said 4 factors determined comparative advantage• Factor endowments – resources• Demand Conditions – nature of home demand• Relating and Supporting industries – related

industries. Stuff tends to be clustered• Firm strategy, structure, and rivalry – how

companies are managed, organized, etc. Local competition makes for better advantage globally

Tariff

• Tax on imports

Specific tariff

• Tariff levied as a fixed charge for each unit of good imported

Ad Valorem Tariff

• Levied as a proportion of the value of an imported good

Subsidies

• Government payment to a domestic producer

Import Quota

• Direct restriction on the number of a good that may be imported into a country

Tariff Rate Quota

• Applying a lower tariff rate to imports within the quota

Voluntary Export Restraint

• Quota imposed by the exporting country

Local Content Requirements

• A requirement that some specific fraction of a good be produced domestically

Administrative Policies

• Rules designed to make it difficult for imports to enter a country

• Example: japan required searching of packages for pornography, making quick deliveries impossible

Antidumping Policies

• Dumping – selling goods in a foreign market at below their costs of production, or below fair market value

• Antidumping Policies – designed to punish foreign firms that engage in dumping and protect domestic producers from unfair foreign competition

Infant Industry Argument

• New industries should be temporarily protected from foreign competition, until they can hold their own in the global marketplace

Strategic Trade Policy

• Government should use subsidies to support promising firms that are active in newly emerging industries, to help them get first mover advantage

• Second, when they are not the first, is to help them overcome the first-mover advantages of foreign countries

GATT

• Established 1947• Objective – liberalize trade by eliminating

tariffs, subsidies, import quotas, etc

Uruguay Round

• Tariffs reduced• Agricultural subsidies reduced• Protection for intellectual property• WTO created

WTO

• Polices the GATT agreement

Flow of FDI

• Amount of FDI undertaken over a given time period

Stock of FDI

• Total accumulated value of foreign-owned assets at a given time

Outflows of FDI

• Flow of FDI out of a country

Inflows of FDI

• Flows of FDI into a country

United states big part of FDI

• It had a large economy during the post-war period and many large enterprises

Oligopolies

• Firms tend to imitate each other’s FDIs

Product Life Cycle

• At some point, businesses will use FDI for their products when there is demand in other countries

Free Market View of FDI

• FDI benefits both source country and host country

Radical View of FDI

• Source country exploits host country for profits

Pragmatic Nationalism

• FDI benefits host countries, but it comes at a cost

Location-specific advantages

• Advantages that arise from utilizing resources that are tied to a particular foreign location

Benefits of FDI to host country

• Resource transfer – they get stuff they may not normally get (like technology)

• Employment – gives jobs to host country• Balance of payments – gives country more

exports and less imports• Increases global competition, reducing prices

Costs to host country

• Competitors to domestic companies• Balance of accounts – hurts it if they import

most of their parts, rather than buy them in the nation

• Fear of losing economic independence

Home Country Benefits

• Creates demand for home country exports• Profits for companies• Multinationals learn skills from their foreign

companies that can be used at home

Home country costs

• Reduced home country employment

FDI types

• Greenfield Investment – new facility• Acquisition or merger with existing local firm

Gross Fixed Capital Formation

• Summarizes the total amount of capital invested in factories, stores, office buildings, and the like

Internalization Theory

• Argument that firms prefer FDI over licensing to retain control over know-how, manufacturing, marketing and strategy

• They wanna do it themselves

Licensing

• Firm licenses right to produce a product to a foreign firm, and collects a royalty for it

Economic Integration

• Agreements among countries in a geographic region to reduce, and ultimately remove, tariffs and barriers to the free flow of goods and services between eachother

European Union EU

• The countries dropped their trade borders to eachother and adopted a single currency for doing business

NAFTA

• North American Free Trade Agreement• Free trade between Canda, USA, and Mexico

Levels of Economic Integration

Free Trade area

• No barriers to trade between countries in agreement

• Individual countries still free to decide how to deal with non-members

• NAFTA• EFTA (european free trade association)

Customs Union

• Group of countries committed to removing all barriers to flow of goods and services

• Pursuit of a common external trade policy

Common Market

• Everything customs union has, but also factors of production can move freely between members

• Labor and capital are free to move

Economic Union

• Same as those before, but requires common currency, harmonization of tax rates, and common monetary and fiscal policy

• EU is an economic union, though imperfect since not all of its countries have adopted the Euro

Political Union

• Where all of the above are true, and government coordinates

• United States is an example

Trade Creation

• Trade created due to regional economic integration, occurs when high-cost domestic producers are replaced by foreign producers

Trade Diversion

• When low-cost foreign suppliers outside a free trade area are replaced by higher-cost foreign suppliers in a free trade area

EU

• Global Superpower due to high GDP• 27 member states

Single European Act

• Committed members to establishing an economic union

• Remove trade barriers• Mutual product standards between countries• Reduce restrictions on transporting between

countries

Euro Benefits

• Simpler between-country transactions• Easier to compare prices across europe• Long term efficiency of countries

Euro costs

• Nations lose control over monetary policy

Joining the EU

• Have to privatize state assets, deregulate markets, restructure industries, and tame inflation

• Enshrine EU laws into their own systems, establish democratic governments, and respect human rights

Optimal Currency Area

• Similarities in the underlying structure of economic activity make it feasible to adopt a single currency

European Council

• Most important EU authority• Represents interests of member states• Draft legislation from Commission can only

become law if the council agrees

European Commission

• Body responsible for proposing EU legislation, implementing it, and monitoring compliance

European Parliament

• Elected EU body that consults on issues proposed by the european commission

Court of Justice

• Supreme appeals court for EU law