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Theory Review

Theory Review. Global Trade and Finance. Our Market International Trade ROW Market. US S. US D. Exports. ROW Sx. ROW S. Imports. US Dm. ROW D. Classical trade theory. Smith-Ricardo, Heckscher -Ohlin, Stolper Samuelson

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Theory Review

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  1. Theory Review Global Trade and Finance

  2. Our Market International Trade ROW Market US S US D Exports ROW Sx ROW S Imports US Dm ROW D

  3. Classical trade theory. Smith-Ricardo, Heckscher -Ohlin, Stolper Samuelson • How to trade beyond the Production-Possibilities Curve

  4. Social choice (the CIC) will determine whether the UK and SA will consume at C or D. • Trading along TT’, the UK and SA can consume outside their PPC. T’ . England South Africa .C T’ . . CIC CIC . T . T

  5. Review Characteristics of Markets • Pure Comp? • Ease of entry, no L-R pure NR, many sellers, no differentiation

  6. Review Characteristics of Markets • Monopoly? • Single seller, first-mover econs of scale or barriers (e.g., a franchise), regulation usual.

  7. Review Characteristics of Markets • Oligopoly? • Few sellers, interdependence, policy uncertainty, struggle for market share, differentiation, non-price competition.

  8. Review Characteristics of Markets • Monopolistic competition? • Ease of entry so no L-R pure NR, unless entry limited through licensing, differentiation to tilt D curve down, appeal to preferences

  9. Review Characteristics of Markets • Ease of Entry ? PC, MC • Product Differentiation? MC, Olig • Interdependence and uncertainty? Oligopoly • No interdependence? (No bus policy interaction) in MC • Profitability “slack”, even in long term? Monop, Olig, Licensed MC

  10. Modern Trade Theory • Compare modern and classical theories

  11. What role did international trade theory play in the classical perception of the domestic economy? • Was this realistic? • In Britain? • In the U.S.?

  12. Classical Trade Theory Pure Competition Trade Sector on periphery Pursuit of comparative advantage with inter-industry trade Domestic Markets

  13. Why did the modern theory develop? • What are it’s two pillars? • Global markets • A role for government

  14. Classical Theory Pure Competition Economies of (trade assumption) Scale Natural (domestic) monopolies Regulation Trade Sector on Periphery Global Markets Domestic Markets

  15. What did Krugman see as the possibilities for government intervention?

  16. Modern Theory Economies of Scale “Productive” (?) possibilities for government intervention 1. Optimal Tariffs 2. Supporting Investments/ Promoting exports Global Markets Monopolistic Competition Oligopoly Monopoly

  17. One more time, what is intra-industry trade? • How do you calculate it? Two-way trade = IIT Total trade = IIT + Inter-industry trade IIT = 1 - sum of |X-M| sum of X + M X $100 mil perfume, M $50 mil. IIT = 1 – (50/150) = 1 – 0.33 = .66

  18. One more time, what is intra-industry trade? • How do you calculate it? Two-way trade = IIT Total trade = IIT + Inter-industry trade IIT = 1 - sum of |X-M| sum of X + M M $60 b cars, X $40 b IIT = 1 – (20/100) = 1 – 0.2 = .80 • Why has it grown?

  19. Global Markets Growth of intra-industry trade A response to preferences expressed in international trade demands. Monopolistic Competition Oligopoly Monopoly

  20. Trade Policy: Tariffs (normal and optimal), Quotas, and VERs.

  21. Sd Sd plus quota PD w/ quota a b d PROW Dd S0 S1 D1 D0 A quota is much like a tariff. C represents internal redistribution from the consumer to whomever gets the import licenses. a = Change from CS to PS b = “Production effect” c = Quota rents d = “Consumption effect” P c Q

  22. Show the idea of VERs.

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