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Chapter 1 Chapter 1 Introduction Introduction Prepared by Iordanis Petsas To Accompany nternational Economics: Theory and Policy nternational Economics: Theory and Policy, Sixth Edit by Paul R. Krugman and Maurice Obstfeld

Chapter 1 Introduction Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy International Economics: Theory and Policy,

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Page 1: Chapter 1 Introduction Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy International Economics: Theory and Policy,

Chapter 1Chapter 1IntroductionIntroduction

Prepared by Iordanis Petsas

To Accompany International Economics: Theory and PolicyInternational Economics: Theory and Policy, Sixth Edition

by Paul R. Krugman and Maurice Obstfeld

Page 2: Chapter 1 Introduction Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy International Economics: Theory and Policy,

Slide 1-2

International economics deals with economic interactions that occur between independent nations.

There are several issues that recur throughout the study of international economics: -

Gains from trade, The Pattern of Trade, Protectionism, How Much Trade?, The Balance of Payments, Exchange Rate Determination, International Policy Coordination, and the International Capital Market.

The most important themes for this academic year (2011-2012) are:

Gains from trade Protectionism The International Capital Market

What is International Economics About?

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Slide 1-3

What exactly do people gain when they trade with one another?

Comparative advantages and specialization. As the theory of comparative advantage states, a country can increase its standard of living by specializing in what it can make at low opportunity cost and trading for what it can make only at high price. The theory of comparative advantage also shows that total production in both countries increases with specialization.

Increased variety of goods. Free trade gives consumers in all countries greater variety from which to choose (German car versus American car).

The Gains from Trade

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Slide 1-4

Lower costs through economies of scale. Some goods can be produced at low cost only if they are produced in large quantities—a phenomenon called economies of scale. Free trade gives firms access to larger world markets and allows them to realize economies of scale more fully.

Increased competition. Opening up trade fosters competition and gives the invisible hand a better chance to work its magic. It restricts the ability of domestic companies to have market power, which in turn gives it the ability to raise prices above competitive levels.

The gains from trade

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Slide 1-5

Enhanced flow of ideas. With specialization and trade, the total sum of knowledge used in an economy increases tremendously and far exceeds that of any one brain. Without trade, the knowledge used by an entire economy is approximately equal to the knowledge used by one brain.

 

The Gains from Trade

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Slide 1-6

The Gains and Losses of An Exporting country. The main two conclusions: When a country allows trade and becomes an

exporter of a good, domestic producers of the good are better off, and domestic consumers of the good are worse off.

Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers.

 

THE WINNERS AND LOSERS FROM TRADE

 

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Slide 1-7

What is International Economics About?

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Slide 1-8

The Gains and Losses of an Importing Country.

 • When a country allows trade and becomes an importer of a good, domestic consumers of the good

are better off, and domestic producers of the good are worse off.

• Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed

the losses of the losers.

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Slide 1-9

Question (1): If the government allows a Isolandians to import and export textiles, what will happen to the price of textiles and the quantity of textiles sold in the domestic textile market?

Answer: Once trade is allowed, the Isolandian price of textiles will be driven to equal the price prevailing around the world. If the world price is now higher than the Isolandian price, our price will rise. The higher price will reduce the amount of textiles Isolandians consume and raise the amount of textiles that Isolandians produce. Isoland will, therefore, become a textile exporter. This occurs because, in this case, Isoland has a comparative advantage in producing textiles.

Conversely, if the world price is now lower than the Isolandian price, our price will fall. The lower price will raise the amount of textiles that Isolandians consume and lower the amount of textiles that Isolandians produce. Isoland will, therefore, become a textile importer. This occurs because, in this case, other countries have a comparative advantage in producing textiles.

The Lessons for Trade Policy in Isoland country

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Copyright © 2003 Pearson Education, Inc. Slide 1-10

Question: Who will gain from free trade in textiles and who will lose, and will the gains exceed the losses?

Answer: The answer depends on whether the price rises or falls when trade is allowed. If the price rises, producers of textiles gain, and consumers of textiles lose. If the price falls, consumers gain, and producers lose. In both cases, the gains are larger than the losses. Thus, free trade raises the total welfare of Isolandians.

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Question: Should a tariff be part of the new trade policy? Answer: A tariff has an impact only if Isoland becomes a

textile importer. In this case, a tariff moves the economy closer to the no-trade equilibrium and, like most taxes, has deadweight losses. Although a tariff improves the welfare of domestic producers and raises revenue for the government, these gains are more than offset by the losses suffered by consumers. The best policy, from the standpoint of economic efficiency, would be to allow trade without a tariff. We hope you find these answers helpful as you decide on your new policy.

Slide 1-11

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Key terms

Comparative advantage Absolute advantage Child labor Export Import Domestic producers Foreign producers Specialization Knowledge Information

Slide 1-12

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Chapter 2: Arguments against International Trade (Protectionism)

Trade and jobs. Trade does eliminate jobs, Because domestic factories cannot compete with foreign industries.

Child labor . Another justification of restricting trade is that some companies in the exported country have employed child workers to produce its products. Thus, some claim that importing any goods that made by children under the age of 15 must be prohibited.

Slide 1-13

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Trade and National Security. some argue that restrictions are necessary to avoid any imported goods which may badly affect the health of people (In 1918, more than a quarter of the U.S. population got sick with flu and more than 500,000 died).

Key Industries. Another argument is the "it is better to produce computer chips than potato chips" argument. The idea is that the production of computer chips is a key industry because it generates spillovers, benefits that go beyond the computer chips themselves.

Slide 1-14

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Strategic Trade Protectionism. Sometimes, the government use tariffs and quotas to

help domestic firms to act like a cartel when they sell to international buyers. Oddly, the way to do this is to limit or tax exports. A tax or limit on exports reduces exports but can drive up price enough so that net revenues increase.

Slide 1-15

Page 16: Chapter 1 Introduction Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy International Economics: Theory and Policy,

The Instruments of Trade Policy

The tariff. A tariff is simply a tax (duty) levied on a product when it crosses national boundaries.

The most widespread tariff is the import tariff, which is a tax levied on an imported product. A less common tariff is an export tariff, which is a tax imposed on an exported product. Export tariffs have often been used by developing nations.

Two purposes of tariff: A protective tariff: it is designed to reduce the amount of imports entering

a country, thus insulating import-competing producers from foreign competition.

A revenue tariff: it is imposed for the purpose of generating tax revenues and may be placed on either exports or imports.

Slide 1-16

Page 17: Chapter 1 Introduction Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy International Economics: Theory and Policy,

 Other Instruments of Trade Policy

Export Subsidies. An export subsidy is a payment to a firm or individual that ships a good abroad.

Import Quotas. An import quota is a direct restriction on the quantity of some good that may be imported. The restriction is usually enforced by issuing licenses to some group of individuals or firms.

For example, the United States has a quota on imports of foreign cheese. The only firms allowed to import cheese are certain trading companies; the size of each firm's quota is based on the amount of cheese it imported in the past.

Slide 1-17

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 KEY TERMS

protection. export restraint. export subsidy. import quota. specific tariff.

Copyright © 2003 Pearson Education, Inc. Slide 1-18

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Trade Policy in Developing CountriesTrade Policy in Developing Countries

Prepared by Iordanis Petsas

To Accompany International Economics: Theory and PolicyInternational Economics: Theory and Policy, Sixth Edition

by Paul R. Krugman and Maurice Obstfeld

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Slide 11-20

Infant Industry argument1- According to the infant industry argument, developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries in developing countries cannot initially compete with well-established manufacturing in developed countries. Thus, it makes sense, according to this argument, to use tariffs or import quotas as temporary measures to get industrialization started.

�طةيش��تو م��يزةي نس��بيان �نت��ة والت��اني ت��ازة ثي �ي ئ��ةم ئارطيومي بةثيComparative advantage( هةي�ة ل�ة مانيف�اكتؤرةدا Manufacture ب�ةالم )

�ي نيي�ة لةط�ةل بركي ثيشةس�ازي مانيف�اكتؤرة ل�ةم والتان�ةدا توان�اي كي���شكةوتو. �زةكاني والتاني ثي ثيشةسازية بةهي

( قبولكردنة و �نان �هي باوةرثي �طاي جي �داية، تي مةعقوليةتي Makeبؤية senseك�� )( ة حكوم��ةت ل��ةم قؤناغ��ةدا ط��ومرطtariffs ي��ان ثش��كي )

�ت ب����ؤ ئ����ةوةي �( Import qoutas )ه����اوردة )ح�ص����ص( دا�ب����ني��بكات. بةثيشةسازيكردن دةست ثي

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2- Another reason why infant industry protection may be a good idea is imperfect capital markets: developing countries do not have a set of financial institutions that would allow savings from traditional sectors to be used to finance investment in new sectors.

زط��اريكردن ل��ة ثيشةس��ازي س��اوا رةنط��ة� �كي ت��ر ك��ة بؤض��ي ثاري هؤك��اري�ت بر�يتي��ة ل��ة� نات��ةوا�وي ب��ازاري س��ة�رماية�: والت��اني ت��ازة ئ�ايدياي��ةكي ب��اش� بي��وةية�ك ه�اني �ثاش�ةك�ةوت� ب�دات ل�ة �طةيش�تو دام�ةزرا�وةي دا�راي�ي�ان� نيي�ة ب�ة �ش�ي ثيدا �كتةري نوي���� �نان ل���ة س���ي �كتةري تةقليديي���دا ت���ا ب���ؤ دارايي وةب���ةرهي س���ي

�ت. �نري بةركاريهيThus the first-best policy is to create a better capital market, the second-best policy is to protect new industries, which would raise profits and thus allow more rapid growth

�كي س�ةرمايةي بؤي�ة يةكةم-باش�ترين سياس�ةت بريتي�ة ل�ة دروس�تكردني ب�ازاريي�زط�اريكردن ل�ة ثيشةس�ازي باش�تر، دووةم-باش�ترين سياس�ةت بريتي�ة ل�ة ثاري

�ت. �راتر بي �طادةدات طةشة خي Slide 11-21نوي�، كة قازانج زياد دةكات و ري

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3- The problem of spillover: The idea is firms in a new industry generate social benefits for which they are not compensated. Pioneering firms may, in addition to producing physical output, create intangible benefits (such as knowledge or new markets) in which they are unable to establish property rights. In some cases the social benefits from creation of a new industry will exceed its costs, yet because of the problem of spillover no private entrepreneurs will be willing to enter.

.ت� �كي ت�ري ثش�تطيري ئ�ةم ئايدياي�ة داب�نري طرف�تي س�ثيلؤظةر دةك�ري� ب�ة هؤك�اري�ك ئاي�دياك�ة بريتي�ة ل�ةوةي كؤ�مثا�نياك�ان )ثرؤذةك�ان( ل�ة ثيش�ةس�ازي�يةكي نو�ي��دا هةن�دي�ن��ةوة لةس��ةري. �نن ك��ة قةرة�بوناكري ك��ةل�ك ي��ان س��ودي كؤ�مةالي��ةتي �بةرهةم��دةهي�ش�ةنط�ةكان رة�نط�ة، س�ةرباري ئ�ة�وةي بةره�ةمي �م�ادي� دروس�ت د�ةك�ةن، ث�رؤذة ثي�وةيةك ك�ة س�ودي� ن�ةبي�نراو درو�س�ت بك�ةن )و�ةك زا�نين ي�ان ب�ازا�ري ن�وي�( بةش�ي�جار س�ود�ي كؤمةالي�ة�تي دروس�تكردني �زن. هةن�د�ي �تي بث�ا�ري ن�اتوا�نن م�افي� خاوةن�دا�ري�م� ب�ةهؤي ط�رف�تي س�ثيلؤظةوة هيض �ت، ب�ةال �ني �دة�ث�ةري �ض�ونةك�ةي تي ثيش�ةس�ازي ن�و�ي� تي

��تة ناو ئة�م بازارة�وة.� �ط لة كةر�تي تايب�ةت ئاماد�ة ني�ية بضي �شةن�طي Slide 11-22ثي

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Slide 11-23

Problems with the Infant Industry argument ِ

Economists have pointed out many pitfalls in the argument, suggesting that it must be used cautiously. (What are the main problems with Infant Industry argument?)

�ك ل�ة ئابوريناس�ان ئام�اذة ب�ة ض�ةندين مةترس�ي ش�اراوة دةك�ةن ك�ة Pitfallsهةن�دين�اض�ارم�ان دةك�ات �زؤر ب�ة و�ريايي�ةوة� مامةل�ة ل�ةط�ةل �ئ�ةم �سياس�ةتة� بك�ةين، لةب�ةر

ئةم هؤيانة: 1- First, it is not always good to try to move today into the industries that will

have a comparative advantage in the future. ت���ة� �ت روبكري �ت ك���ة هةولب���دري يةك���ةم، م���ةرج نيي���ة هةميش���ة ئ���ةوة ب���اش بي

�ت. ثيشةسازييةك كة لة داهاتودا ئةطةري ئةوة هةية ميزةي نسبي هةبي ل. 1980بؤ نمون�ة: ل�ة� كان�دا كؤري�اي باش�ور دةس�تي ك�رد ب�ة ه�ةناردةكردني ئؤتؤم�بي

ةكان�دا روبكات�ة �ه�ةناردةكر�دني� س�ةيارة و واز� ل�ةو 1960ب�ةالم� خ�ؤ ن�ةد�ةكرا ل�ة �ك�دا ئ�ةو� ك�ا�ت�ة �دةس�تي �ك�اري �ت ك�ة� ثش�تي ب�ة �ك�ا�ر دة�ب�ةس�ت �ل�ة ك�ات�ي� �ني ث�يشةس�ازيانة ب�ه�ي��نت�ة ئةوةي�ة ش�ار�ةزا�ي� و �س�ة�رماي�ةي ك�ة�م�بوو�. ب�ةم� �ماناي�ة، �م�ةترس�يةك� ل�ةم ئار�طي�ومي�نين� و �ذيان�م�ا�ن بخات�ة� �ت ه�ان�م�ان ب�دات� واز �ل�ة هةن�دي�� ثي�ش�ةس�ا�زي به�ي�� ك�ة دة�ش�يدي ئ��ةوةي �ل��ة �ئاي�ن��دةد�ا� �ثيشة�س��ازيية�كانم�ان دةط�ةن��ة ض��اوةرو�ا�نييةوة �ب��ة �ئومي���

�رنةوة�. ب�ازار�ةك�اني جي�هان و خؤش�بة�ختي بؤ �والت دة�ني

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Slide 11-24

2- protecting manufacturing does no good unless the protection itself helps make industry competitive.

دووةم، ثاراس�تني مانيفاكتؤرةك�ة ماي�ةي دلخؤش�ي نيي�ة مةط�ةرunless زبوني توان��اي� �ت��ة ه��ؤي �ب��ةه�ي �زطاريكردنةك��ة ببي خ��ودي ثا�ري

�بركي�. كي�ك ل�ة نمون�ة: ثاكس�تان و هين�د ب�ؤ ض�ةند دةيةي�ةك ق�ةلغانيان ب�ة دةوري هةن�ديمان�يفاكتؤ�رةكاني�ان دروس�ت ك�ر�د، و ب�ة�م د�وايي�ةش �زؤر ل�ة ب�ةرهةم�ةكا�ني ئ�ةو

(، however)مانيفا�كتؤران�ة� طةيش�تنة بازارة�ك�اني ج�يه�ان. لةط�ةل�� ئةمةش�دا Lightئةم� بةرهةمان�ةي ئةوان دةيانن�اردة دةرةوة� مان�يفاكتؤرةي س�وك بون

manufactures وةك�و نةس�يج، �ن�ةك بةره�ةمي ئ�ةو مانيفاكتؤ�ران�ةي ك�ة ق�ورس دةكرا. ئ��ةم جياوازيي��ة ب��ة heavy manufacturesب��ون �زطاريي��ان لي��� و ثاري

�رن�ة ئةندازةي�ةك ب�وو ك�ة ه�ةر دةت�و�ت ئ�ةو�ان دةي�انت�واني ئ�ةو ش�م�ةكا�نة بني�ك� ل�ة مانيف�اكتؤ�رةكاني�ان ه�ةرطيز �ويس�ت �بك�ات� هةن�دي دةرةوة ب�ي� ئ�ةوةي� ثي�

�زن . if they had never protected manufacturingبثاري

Example

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Slide 11-25

3- More generally, the fact that it is costly and time-consuming to build up an industry is not an argument for government intervention unless there is some domestic market failure.

نتي ”بين�اكردني ثيشةس�ازي ن�وي�� لة س�ةرو ئةمانةش�ةوة، ئ�ارطيومي�ض�وني زؤر هةي�ة و� ئةم�ةش ل�ة ت�وان�اي �وي�س�تي ب�ة ك�اتي زؤر� و ت�ي ثيك�ةرتي� تاي�بةت�دا �نيي�ة�“ ب�ةس نيي�ة �ب�ؤ ئ�ةو�ةي ح�كوم�ةت �دةس�توةربداتة

�ت ئ�ابوريي�ةوة� �ن�ا بي مةط�ةر� ب�ازاري ن�اوخؤيي ل�ةو ب�وار�ةدا �شكس�تي هيunless there is some domestic market failure .

ت�ةوة ب�ؤ� �ري ئةط�ةر ثيشةس�ازييةك دةس�تكةوتي زؤر دروس�ت بك�ات و بطيه�ةر ي�ةك �ل�ة ك�ا�ر و� س�ةر�ماية� و �فاكت�ةر�ةكاني ديك�ة، ب�ؤض�ي ك�ةرتي ت�ايب�ةتي

؟ without government helpئ�ةم� ض�ا�الكية ن�ةك�ات بي�� ها�وك�اري حك�وم�ةت �ت، �وةك ثيشةس�ازي �طوم�ان داخل�ي ئ�ةم ج�ؤرة ثيشةس�ا�زيانةش دةبي� بي

دةرمان لة ئةمةريكا

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4- Both the imperfect capital markets argument and the spillover case are clearly special cases of the market failures justification for interfering with free trade. The difference is that in this case the arguments apply specifically to new industries rather than to any industry.

نتي نات�ةواوي ب�ازاري س�ةرماية و س�ثيلؤظة ب�ة روني بري�تين� هةردوو ئ�ارطيوميل�ة �كةيس�ي� تايب�ة�تي شكس�تي ب�ازا�ر ك�ة� بونةت�ة ثاس�او� ب�ؤ د�ةس�تو�ةردان� ل�ة �نت�ة ب�ةس�ةر �ثيشةس�ازي ب�ازرط�اني� ئ�ازا�د. جياوازيةك�ة ئ�ةوةي�ة ك�ة ئ�ةم �ئارطيومي

�ت و بةس نةك بؤ هةر ثيشةسازييةك. �دا دةسةثي نوي However, in practice it is difficult to evaluate which industries really

warrant special treatment, and there are many stories of infant industries that have never grown up and remain dependent on protection.

لةط��ةل ئةمةش��دا، ل��ة ثراكتيك��دا هةلس��ةنطاندني ئ��ةو ثيشةس��ازيانةي�كي �تايب�ة�تي هةي�ة ئاس�ان ني�ي�ة، و زؤر �ض�يرؤكي�ش هةي�ة �ويس�تيان ب�ة باي�ةخي ث�ي�س�تاش دةرب�ا�رةي ث�يشةس�ا�زي �س�اوا ك�ة ه�ةرطيز �طةش�ةيان �ن�ةكرد �و ت�ا ئ�ي

�طاريكردن دةبةستن. �زي ثشت بة ثاريSlide 11-26

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import-substituting industrialization.

It is the strategy of encouraging domestic industry by

limiting imports of manufactured goods through trade

restrictions (e.g. tariffs and quotas).

The 1950s and 1960s saw the high tide of import-

substituting industrialization. In the early 1970s, India's

supports other than oil were only about 3 percent of GDP.

Slide 11-27

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One might ask why a choice needs to be made. Why

not encourage both import substitution and exports?

The answer is a tariff that reduces imports also

necessarily reduces exports. By protecting import-

substituting industries, countries draw resources away

from actual or potential export sectors.

Slide 11-28

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Why to choose import-substituting strategy?

Many developing countries believed that industrialization was

necessarily based on a substitution of domestic industry for

imports rather than on a growth of manufactured exports.

In many cases, import-substituting industrialization policies

dovetailed (come together) naturally with existing political

bases (e.g. the Great Depression and the wartime disruption of

trade in 1940s).

Slide 11-29

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Converse to export substitution, import substitution

directly benefited powerful, established interest groups.

Some argued that the international economic system

systematically works against the interests of developing

countries.

These arguments remained common until the 1980s.

Slide 11-30

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DEVELOPING-NATION TRADE CHARACTERISTICS

1- Trade among developing nations is relatively minor, although it has increased in recent years

2- Developing nations are highly dependent on advanced nations. A majority of developing-nation exports go to the advanced nations.

3- Another characteristic is the composition of developing-nations’ exports, with its emphasis on primary products (agricultural goods, raw materials, and fuels). Of the manufactured goods that are exported by developing nations, many (such as textiles) are labor intensive and include only modest amounts of technology in their production.

4- Finally, developing-nation imports originate in advanced nations

Slide 1-31