International Investment (ch.7-9)

Related Notes:

CH07 Economic Integration

7.1 Forms of Economic Integration

  • Preferential trade arrangements
    • provides lower barriers on trade among participating countries
  • Free trade areas
    • no barrier on trade among members
    • retains its own barriers on trade with non-members
    • trade deflection:–exporters will target their goods to the low-protection member of the free trade area to gain entry to the entire free trade area.
  • Customs union
    • no barrier on trade among members
    • harmonizes trade policies toward the rest of the world
  • Common market
    • no barrier on trade among members
    • harmonizes trade policies toward the rest of the world
    • allows free movement of labor and capital among member nations
  • Economic union
    • no barrier on trade among members
    • harmonizes trade policies toward the rest of the world
    • allows free movement of labor and capital among member nations
    • unifies monetary, fiscal, and exchange policies
  • Duty free zones
    • Areas established to attract foreign investments by allowing raw materials and intermediate products in duty free.

7.2 Trade Creation and Diversion in Customs Unions

Before: A country would buy Japanese products at lower price with tariff.

After: This country forms a customs union with Mexico, it will buy products from Mexico at lower price without tariff.

  • A is trade diversion
  • B-A is trade creation

7.4 Dynamic Benefits from Customs Unions

  • Increased competition
  • Economies of scale in production
  • Stimulus to investment

CH08 Growth and Development with International Trade

8.1 Growth and Development

  • Economic growth is the expansion of a nation’s ability to produce goods and services over time. (the outward expansion of the PPF)
  • Economic development is an improvement in society’s quality of life or standard of living.

Growth occurs through an expansion or improvement in the factors of production.

  • Balanced growth & Unbalanced growth

The Rybczynski Theorem

At a constant relative goods price, a rise in the endowment of one factor will lead to a more proportional expansion of the output in the section which uses that factor intensively.

8.2 Contributions of Trade to Development

  • International trade allows each trading country to consume beyond its domestic ability to produce.
  • International trade also offers potential dynamic (growth enhancing) gains.
    • offer a vent for surplus
    • exploit available economies of scale
    • a freer transmission of ideas internationally
    • stimulate the flow of financial capital
    • new commodities–new demand–new domestic industry
    • constrain domestic monopoly power

8.3 Issues in Trade and Development

8.3.1 Terms of Trade Effects

Types of terms of trade

  • Commodity, or net barter, terms of trade
    • N = (Px ÷ Pm) x 100
  • Income terms of trade
    • I = (Px ÷ Pm) x Qx

As N falls, a nation must export more in order to purchase the same number of imports.

As I falls, a nation’s ability to purchase imports falls.

8.3.2 Immiserizing Growth

A large exporting country may not improve its welfare because of the terms of trade (changes of relative prices).

8.3.3 Export Instability

Short-run fluctuations in export prices and earnings.


  • Developing world exports tend to face inelastic international demand.
    • Price fluctuations in these markets do not significantly change the quantity sold. Thus price fluctuations will generate large movements in revenues collected.
  • Fluctuating environmental conditions (weather, natural disasters, etc.) cause more and larger supply shifts in the developing world than in the developed world.


  • Marketing board
    • stock in good years and sell in bad years
  • International commodity agreements
    • OPEC

8.3.4 Import Substitution vs. Export Promotion Policies

Developing countries —- Industrialization


  • Import substitution industrialization (ISI)
    • Replace imports with domestic production
  • Export oriented industrialization
    • Expand industrialization through expanding domestic exports

Advantages of ISI

  • The market for the product already exists
  • It is easier to close the domestic market to imports than to force developed nations to lower trade barriers.
  • Foreign firms will be encouraged to invest domestically to avoid the barriers to trade.

Disadvantages of ISI

  • Protected industries have reduced incentives to improve and become competitive.
  • The domestic economy may be too small to exploit available economies of scale.
  • Import substitution is difficult for more complex products.

Advantages of Export Orientation

  • Allows for the exploitation of available economies of scale.
  • International competition spurs greater domestic efficiency.
  • Industrial expansion is not limited by the scale of the domestic economy.

Disadvantages of Export Orientation

  • It may prove difficult for infant industries to become established in the face of foreign competition.
  • It may prove difficult to export in the face of protectionist measures in potential international markets.

8.4 Current Problems Facing Developing Nations

  • Poverty
  • Foreign debt
  • Barriers to trade facing developing countries

CH09 International Resource Movements and Multinational Corporations

9.1 Types of International Factor Movement

  • International capital flows
    • Portfolio investment
    • Direct investment and multinational corporations
    ( FDI & OFDI )
  • International labor migration

9.2 Reasons for Portfolio Investment

  • A substitution for international trade
    • factor price equalization doesn’t exist in reality
  • Risk diversification

9.3 Reasons for Direct Investment

  • Internalize the returns to intellectual property
    • Horizontal integration ( e.g. IBM )
      • produce aboard and at home
    • Vertical integration
      • the expansion of firm only provides raw materials and intermediate products
  • Exploit economies of scale
  • Avoidance of trade restrictions

9.4 Effects of Foreign Investment

r = P * MPK

9.5 Reasons for MNCs

Multinational corporations (MNCs)

  • own, control, or manage production and distribution facilities in several countries.

Cost advantages of MNCs

  • Integration may increase profits through better control of supply chains.
  • The larger scale of production may allow the firm to better exploit economies of scale.
  • Intellectual property may be better maintained by MNCs.
  • MNCs can better direct production to low cost nations.
  • MNCs can artificially change prices through different firms in order to minimize its tax bill.
    • Transfer pricing

Home country problems

  • The movement of jobs to other countries.
  • MNCs may move technology out of the home country reducing the technological advantage of the home country.
  • Transfer pricing may reduce taxable income and tax revenue.
  • Access for foreign markets allows MNCs to skirt domestic monetary and fiscal policy control.

Host country problems

  • Loss of domestic governance control
  • Exposure to foreign goods and corporations may undermine the domestic culture.
  • Repatriated profits may undermine domestic capital expansion and R&D resulting in slower economic growth.

9.6 Reasons for Labor Migration

  • The opportunity to earn higher wages
  • Greater educational opportunities
  • Escape from political oppression or conflict

9.7 Effects of Labor Migration

w = P * MPL

作者: 公子小白



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