Related Notes：
- International Trade Theory (ch.1-4)
- International Trade Policy (ch.5-6)
- International Investment (ch.7-9)
- International Finance (ch10-14)
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.
reasons:
- 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.
Responses:
- 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
Strategies:
- 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
- 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
- Horizontal integration ( e.g. IBM )
- 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
