Economies of Scale -​ Monopolistic competitors use

-​ Production with more output can be non-price competition

achieved at a lower cost. ●​ Advertising, giveaways, or
-​ When production Within An industry other promotions
has this characteristic, ●​ The fast food industry is an
specialization, and trade can result example
In Improvements In World productive ●​ More competition
efficiency and welfare benefits that
accrue to all trading countries. Monopolistic Competition (2)
-​ Firms end up in Tangency
Trade between countries doesn’t need to Equilibrium
depend on differences in countries under -​ The firm here is eager to sell more
the assumption of economies of scale. on the going marketplace
-​ Same as pure competition except for
Countries can be identical in all respects, product differentiation (Gap, Levi's, J
yet they find it advantageous to trade. Crew) - Jeans

Economies of Scale Models Monopolistically Competitive market

-​ explain trade among countries (ex. model
US, Japan, and the European Union -​ A cross between a perfectly
-​ Models of trade (Ricardian, competitive market and a
Heckscher-Ohlin) monopolistic market
-​ Trade between the developed
countries makes up a significant Assumptions:
share of world trade 1.​ Many firms produce in a
monopolistically competitive industry
Types of Competition 2.​ Each firm produces a product that is
1.​ Perfect Competition differentiated from all other products
-​ Pure Competition produced by the other firms in the
2.​ Imperfect Competition industry.
-​ Monopolistic Competition 3.​ The differentiated products are
-​ Oligopoly imperfectly substitutable in
-​ Monopoly consumption
-​ This means that if the price
Perfectly Competitive of one good were to rise,
-​ Production takes place with constant some consumers would
returns to scale switch their purchases to
another product within the
Imperfect Competition industry.
-​ Products are slightly different 4.​ This is the free entry and exit of
firms in response to profits in the
Monopolistic Competition industry
-​ Many buyers and sellers are well -​ If firms are losing money
informed, but products are different. (making negative economic
 profits), then, one by one, -​ When a country borrows, it gets the
firms will drop out of the right to spend ot purchase at present
industry. in return for repayment in a larger
quantity in the future
5.​ There are economies of scale in
production Interest = (1 + r)* Quantity borrowed in the
present
2 potential costs of free trade:
1.​ The first involves the potential costs Where: r- real interest rate on borrowing
of adjustment in the industry
2.​ The second involves the possibility Direct Foreign Investment and
that more varieties will increase Multinational Firms
transaction costs. -​ DFI is a firm in one country that
creates or expands a subsidiary in
International Labor Movement another country
-​ If there are no barriers to the labor
movement, the same process ✓When is a corporation considered as
continues until both countries have multinational?
the same marginal product of labor ●​ In the United States, if 10% or more
of the stock of a company is held by
3 points should be noted about the a foreign country, then it is a
redistribution of the world's labor force: subsidiary of a foreign-based
multinational.
1.​ Convergence of real wage rates ●​ Also, if it has a controlling share of
2.​ Increases the world’s output companies abroad.
3.​ Some people are hurt by the change ●​ The logic is that 10% is enough to
have such effective control. Direct
International Borrowing and Lending foreign investments allow the
-​ International borrowing and lending formation of multinational
are forms of international Trade organizations.

Intertemporal Trade The Theory of Multinational Enterprise

-​ Exchange of goods today for goods
in the future Question of Location
-​ Good product produced in two
Intertemporal production possibilities different countries rather than one
and trade
-​ Economies do not consume all of Location of Production
their output at once, but invest it -​ Transport costs and other barriers to
-​ To invest more, the economy must trade may determine location
consume less -​ Alternatively, transport costs and
other barriers to trade may
The Real Interest Rate determine location.
-​
Questions of Internationalization Gainers:
-​ Production in different locations is ●​ The government gains because the
done by the same firm rather than tariff increases government
different ones revenues
●​ Domestic producers gain because
Theory of internalization the tariff affords them some
-​ The output of one subsidiary is often protection against foreign
an input into the production of competitors by increasing the cost of
another or technology developed in imported goods.
one country may be used in others,
or management may usefully Sufferers:
coordinate the activities of plants in ●​ Consumers suffer because they
several countries. must pay more for certain imports.

The Instrument of Trade Policy Subsidies

●​ Government payment to a domestic
Free Trade producer
-​ Situations where a government does ●​ 2 ways Subsidies
not attempt to restrict what its -​ They help producers
citizens can buy from another compete against imports
country or what they can sell to -​ Subsidies help them gain
another country export markets

Trade Policy Measuring the amount of protection (2

-​ A collection of rules and regulations ways)
that pertain to trade. This helps a ●​ In the large country case, the tariff
nation’s international trade run will lower the foreign export price.
smoothly by setting clear standards ●​ Tariffs may have different effects on
and goals that potential trading different stages of the production of
partners can understand. a good.

Basic Tarif Analysis Costs and Benefits of a Tariff

Tariffs -​ Tariff raises the price of a good in
-​ tax levied on imports the importing country and lower it in
the exporting country.
Specific Tariffs
-​ Taxes that are levied as a fixed ●​ Consumers lose in the importing
charge for each unit of goods country and gain in the exporting
imported country
●​ Producers gain in the importing
Ad Valorem Tariffs country and lose in the exporting
-​ Taxes are levied as a fraction of the country
value of the imported goods. ●​ The government imposes the tariff to
gain revenue
 The Political Economy of Trade Policy
Consumer and Producer Surplus ●​ Formal case for the efficiency gains
●​ Consumer Surplus from free trade that is simply the
-​ measures the amount a cost-benefit analysis of trade policy
consumer gains from a read in reverse.
purchase by the difference ●​ Economists believe that free trade
between the price he pays produces additional gains that go
and the price he would have beyond this formal analysis
been willing to pay ●​ Translating complex economic
●​ Producer Surplus analysis into treal policies even
-​ Measures the amount a those who do not see free trade as
producer gains from a sale the best imaginable policy see it as a
by the difference between useful rule of thumb.
the price he receives and the ●​
price at which he would have
been willing to sell.

Other instruments of trade policy

Export Subsidy
-​ Payment by the government to a
firm or individual that ships a good
abroad

Import Quotas
-​ Direct Restriction on the quantity of
a good that is imported GATT (General Agreement on Tariffs &
Trade)
Voluntary Export Restraints -​ A legal agreement between many
-​ The export quota is administered by countries to promote international
the exporting country. Also known as trade by reducing or eliminating
a Voluntary Restraint Agreement. trade barriers such as tariffs or
quotas.
Local Content Requirements -​ 128 members
-​ Regulation requires that some -​ 1st worldwide multilateral free trade
specified fraction of a final good be agreement
produced domestically. -​ Purpose of GATT is to eliminate
harmful trade protectionism
-​ Effect on June 30, 1948 until
January 1, 1995

GATT 3 Main Provisions

●​ Each member must confer most
favored nation status to every other
member (All members must be
 treated equally when t comes to ➔​ Unique global partnership: five
tariffs.) institutions working for sustainable
●​ Excluded the special tariffs among solutions that reduce poverty and
members of the British build shared prosperity in developing
Commonwealth and customs unions countries
●​ Permitted tariffs if their removal ➔​ With 189 members countries
would cause serious injury to
domestic producers. World Bank comprises two institutions
●​ International Bank for
World Trade Organization (WTO) Reconstruction and Development
●​ Born out of the GATT which was (IBRD)
established in 1947 -​ An international financial
●​ A series of trade negotiations, GATT institution offers loans to
rounds began at the end of World middle-income developing
War 2 and were aimed at reducing countries
tariffs for the facilitation of global ●​ International Development
trade on goods. Association (IDA)
●​ Only Global international -​ An international financial
organization dealing with the rules of institution which offers
trade between nations. concessional loans and
●​ The goal is to ensure that trade grains to the world’s poorest
flows as smoothly, predictably developing countries
and freely as possible.
●​ Over 160 members representing World Bank is considered as:
98% of world trade. -​ An organization for liberalizing trade
-​ A forum for governments to
WTO Roles negotiate trade agreements
1.​ It operates a global system of trade -​ A place for them to settle trade
rules disputes
2.​ It acts as a forum for negotiating -​ Operates a system of trade rules
trade agreements
3.​ Its settles trade disputes between its International Monetary Fund (IMF)
members, and -​ Goal is to prevent these disasters by
4.​ It supports the needs of developing guiding its members
countries. -​ An organization of 189 member
countries
International Trade Orgaization (ITO) -​ 7 countries (out of a total of 196
-​ An intellectual precursor of the WTO countries) that are not IMF members
are: Cuba, East timor, north korea,
World Bank liechtenstein, monaco, taiwan, and
➔​ International Financial Institution, vatican city
provides loans all over the world for
capital programs International monetary fund stabilizes
the global economy in 3 ways.
 ●​ Monitors global conditions and elimination tariffs which resulted in
identifies risks. increases investment opportunities.
●​ Advises its members on how to -​ World’s largest free trade agreement
improve their economies -​ Members contribute more than $20
●​ Provides technical assistance and Trillion as measured by Gross
short term loans to prevent financia; Domestic Product
crises.
Functions of NAFTA
European Union (EU) 1.​ Grants the most favored nation
-​ Group of 28 countries that operates status to all co-signers
as a cohesive economic and political (countries myst give all parties
block equal treatment which includes
-​ Nineteen of the countries use the foreign direct investment.)
EURO as their official currency. 2.​ Eliminates tariffs on imports and
-​ Interal single Market exports between the 3 countries.
-​ EU policies aim to ensure 3.​ Exporters myst get certificates of
●​ Free movement of the people origin to waive tariffs
goods services and capital (export must come from US,
within thr internal market canada, and mexico)
●​ Enact legislation in justice 4.​ Establishes procedures to resolve
and home affairs & trade disputes
●​ Maintain common policies on (aims to protect businesses from
trade, agriculture, fisheries, unfair practices)
and regional development 5.​ Respect patents, trademarks, and
copyrights
Goals and Objectives of the European (intellectyal property rights don’t
Union interfere with trade)
1.​ To establish european citizenship 6.​ The agreement allows businesses
●​ Protection of fundamental travelers easy access throughout
human rights and freedoms all 3 countries
2.​ To ensure freedom, security, and
justice Assosciation of Southeast Asian Nations
●​ Co-operation field of justice (ASEAN)
and home affairs ●​ Regional intergovernmental
3.​ To promote economic and social organization compromising 10
progress Southeast Asian states which
4.​ To assert Europe’s role in the world promotes pan-asianism,
intergovernmental cooperation and
North American Free Trade Agreement facilitates economic political military
(NAFTA) educational and cultural intgration
-​ Treaty between Canada, US, and amongst its members and Asian
Mexico states.
-​ 3 countries have agreed to remove
trade barriers between them such as ASEAN Integration
 ●​ ASEAN Vision 2020 hopes to -​ This was followed by the even larger
strengthen the foundation for a East Asia Summit (EAS), which
prosperous and peaceful community included ASEAN Plus Three
of Southeast Asian nations while countries as well as
creating a community that lives in ●​ India
shared stability and prosperity. ●​ Australia
●​ The purpose of establishing an ●​ New Zealand.
integrated economic community is to
accelerate economic growth, This new group acted as a
enhance trade development in the prerequisite for the planned East
region, and allow the freer Asia Community which was
movement of goods, services, skilled supposedly patterned after the
labor, and capital. now-defunct European Community

For nearly 2 decades, the ASEAN -​ The ASEAN Eminent Persons

was composed of only 5 countries, Group was created to study the

🇮🇩
August 8, 1967 Founders possible successes and failures of

🇲🇾
➢​ Indonesia this policy as well as the possibility

🇵🇭
➢​ Malaysia of drafting an ASEAN Charter

🇸🇬
➢​ Philippines

🇹🇭
➢​ Singapore ASEAN Plus SIX
➢​ Thailand -​ ASEAN Plus Six with additional
countries:
Other Southeast Asian countries ●​ Australia
joined at different times: ●​ New Zealand
➢​ Brunei (1984) ●​ India.
➢​ Vietnam (1995) -​ Codification of the relations between
➢​ Laos and Myanmar (1997) these nations has seen progress
➢​ Cambodia (1999) through the development of the
Regional Comprehensive
ASEAN Plus THREE Economic Partnership (RCEP), a
-​ The leaders of each country felt the proposed free-trade agreement
need to further integrate the nations involving the 16 countries of ASEAN
in the region. Beginning in 1997, the plus six.
bloc started creating organizations
with the intention of achieving this The aims and purposes of ASEAN
goal. ●​ To accelerate economic growth,
-​ ASEAN plus three was the first of social progress, and cultural
these and was created to improve development in the region
existing ties with ●​ To promote regional peace and
➢​ People’s Republic of China stability
➢​ Japan ●​ To promote collaboration and mutual
➢​ South Korea asistance on matters of common
interest
 ●​ To assist each other in the form of Results of favoring manufacturing:
training and research facilities Problems of import-substituting
●​ To collaborate for the better industrialization
utilization of agriculture and industry -​ Import substitution led to higher
to raise the people’s living standards rates of effective protection,
●​ To promote southeast asian studies inefficient scale of production, higher
●​ To maintain close, beneficial income inequality and
cooperation, wih existing unemployment.
international organizations with
similar aims and purposes. Problems of the Dual Economy
-​ Most developing countries are
Trade Policy in Developing Countries Characterized by Economic dualism.
-​ In developing countries, trade A high-wage, capital intensive
policies are crafted with the idea that industrial sector coexists with a
a strong manufacturing sector is the low-wage traditional sector.
key to economic development Dualism is associated with trade
policy because a. Dualism is a sign
Import-Substituting industrialization of market failure, and b. Economic
dualism is crafted with the aid of
Infant Industry Argument import substitution policies.
-​ Most important argument for
protecting manufacturing industries DUALISM
-​ Developing countries have a -​ When an economy is not working
potential comparative advantage in well, especially its labor markets.
manufacturing thorough an initial The wage differential argument.
period of protection. ●​ When there is a wage
differential, the
Problems with Infant Industry Argument: manufacturing wage (WM)
➢​ It is not always good to try to move must be higher than the food
today into industries wage (WF).
➢​ Protecting manufacturing is no good
Trade Policy as a cause of economic
Market Failure justifications for infant dualism
industry protection -​ Trade policy has been accused of
➢​ Imperfect capital markets widening the wage differential
justification between manufacturing and
➢​ Appropriability argument agriculture and fostering capital
intensity. Wage differentials are
Promoting Manufacturing through natural market responses and the
protection monopoly power of unionswhose
Import-Substituting industrialization industries are protected from foreign
-​ Limiting imports of manufactured competition
goods to encourage domestic
industry to produce more.