The political economy of international trade cooperation
Download
1 / 53

The Political Economy of International Trade Cooperation - PowerPoint PPT Presentation


  • 95 Views
  • Uploaded on

The Political Economy of International Trade Cooperation. READING ASSIGNMENT: Oatley – Chapter 3 Suggested (not required) further reading:

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'The Political Economy of International Trade Cooperation' - lidia


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
The political economy of international trade cooperation

The Political Economy of International Trade Cooperation

READING ASSIGNMENT:

Oatley – Chapter 3

Suggested (not required) further reading:

Grieco, Joseph M. and John Ikenberry. 2003. The Economics of International Trade. In Grieco and Ikenberry, State Power and World Markets: The International Political Economy. New York: W.W. Norton & Co. pp19-56.


The political economy of international trade cooperation
Plan

  • Building blocks (indifference curves, MRS, production frontiers MRT)

  • Opportunity costs & Comparative advantage

  • Factor endowments & Hecksher-Ohlin Model

  • Prisoner’s dilemma


Building blocks
Building blocks

  • Consumption indifference curves

  • Production possibility frontiers

  • Analysis of optimized production-consumption equilibrium (without trade)


Consumption indifference curves
Consumption indifference curves

  • Consumption  happiness  (UTILITY)

  • More is better!

  • But indifferent between some baskets

  • E.g.

    U (2 pairs of shoes & 2 Dell desktop computers)

    =

    U (6 pairs of shoes & 1 Dell desktop computer)

  • For our purposes, we’ll consider aggregate "national" consumption indifference curves


The political economy of international trade cooperation

  • Points A, B, C, & D provide the country with the same level of “satisfaction.”

  • Why curved?

    • Declining marginal utility from consumption

    • D to C:

      • If you are at D, you’ll sacrifice 2 million computers for just 10 million shoes

    • B to A:

      • If you are at B, you’ll sacrifice 2 million computers only if compensated with 40 million shoes

  • DECLINING MARGINAL RATE OF SUBSTITUTION

  • Any point along U1 beats any point along U0 – you want to move to the highest indifference curve


Budget constraint
Budget Constraint? of “satisfaction.”

Slope of this line is the

MARGINAL RATE OF PRODUCT TRANSFORMATION


Putting the two together
Putting the two together of “satisfaction.”


Production possibilities frontier
Production possibilities frontier of “satisfaction.”

  • Opportunity costs  negative slope

  • Straight line  constant opportunity costs

  • Increasing opportunity costs?

  • Arise under decreasing returns to scale

  • Suppose a trade-off between rice and grapes

  • Some land more suitable for rice than grapes and vice versa

  • Suppose you start out with all grapes

  • If you want to switch to rice, you begin with the best land for rice/worse land for grapes

  • Eventually, you will run out of good-rice-land, and start taking good-grape-land

  • The opportunity cost of switching to rice increases and increases


The political economy of international trade cooperation


Optimizing under autarky no trade
Optimizing under autarky (no trade) to 4 million computers) reduces shoe production only by 10 million

  • Given our preferences (consumption indifference curves)

  • And our production possibility frontier,

  • Where to we maximize our utility?


Answer
Answer to 4 million computers) reduces shoe production only by 10 million

MARGINAL RATE OF SUBSTITUTION

=

MARGINAL RATE OF PRODUCT TRANSFORMATION

MRS = MRT


Why do countries engage in trade
Why do countries engage in trade? to 4 million computers) reduces shoe production only by 10 million

  • Ricardian model: 2 countries, 2 goods & CONSTANT opportunity costs

  • Logic of COMPARATIVE ADVANTAGE


The political economy of international trade cooperation

Example is a li’l out of date… to 4 million computers) reduces shoe production only by 10 million

  • One American worker can produce more computers or more shoes than one Brazilian worker

  • US has an ABSOLUTE ADVANTAGE in both computers and shoes

  • So why trade?


Differences in opportunity costs
Differences in opportunity costs! to 4 million computers) reduces shoe production only by 10 million

  • Suppose we move one American worker from Computers to Shoes

  • We lose 50 computers for 200 shoes

  • For each additional pair of shoes produced, the US must forgo 0.25 computers (50/200=¼)

  • The (constant) opportunity cost of each pair of shoes is ¼ computer

  • The (constant) opportunity cost of each computer is 4 pairs of shoes (200/50=4)


Differences in opportunity costs1
Differences in opportunity costs! to 4 million computers) reduces shoe production only by 10 million

  • Suppose we move one Brazilian worker from Computers to Shoes

  • We lose 5 computers for 175 shoes

  • For each additional pair of shoes produced, Brazil must forgo 0.03 computers (5/175=0.029)

  • The (constant) opportunity cost of each pair of shoes is 0.03 computer

  • The (constant) opportunity cost of each computer is 35 pairs of shoes (175/5=35)


Critical point
Critical point to 4 million computers) reduces shoe production only by 10 million

  • Where is it RELATIVELY cheaper to produce computers?

    • In the US it costs 4 shoes

    • In Brazil it costs 35 shoes

  • Where is it RELATIVELY cheaper to produce shoes?

    • In the US it costs ¼ computer

    • In Brazil it costs 0.03 computer


The political economy of international trade cooperation

Under trade, we may negotiate terms of trade where to 4 million computers) reduces shoe production only by 10 million

MRT= –100/10 = –10 or –175/17.5= –10

In autarkic Brazil, the (constant) MRT= –175/5= –35

In autarkic US, the (constant) MRT= –200/50= –4


Terms of trade
Terms of trade to 4 million computers) reduces shoe production only by 10 million

  • Obviously the US wants more than 4 pairs of shoes per computer (because this is its autarkic MRT)

  • Obviously Brazil wants computers for less than 35 pairs of shoes

  • How do we get to the compromise of 10?


Key problems
Key problems to 4 million computers) reduces shoe production only by 10 million

  • Why don’t we observe full specialization in one good per country?

  • Why do some countries have a comparative advantage in some goods and not others?



The political economy of international trade cooperation

  • US is at EaA (“autarkic America”) opportunity costs

  • Brazil is at EaB (“autarkic Brazil”)

  • “Satisfaction” is at U0A & U0B, respectively

  • With trade, US shifts towards more computer production, Brazil towards shoes

  • As they shift, however, OPPORTUNITY COSTS INCREASE


Where do they stop
Where do they stop? opportunity costs

  • We continue until MRT(A)=MRT(B)=MRS(A)=MRS(B)

  • Suppose “markets clear” at an exchange ratio of 1 computer for 6 pairs of shoes (light line in the figures)

  • Countries move to CtA and CtB, respectively, and get U1A and U1B


Why don t we get complete specialization
Why don’t we get complete specialization? opportunity costs

  • Specialization and trade eventually eliminate the differences with regard to opportunity costs between goods (because of increasing opportunity costs)


Why does one country have a comparative advantage in one area

Why does one country have a comparative advantage in one area?

Heckscher-Ohlin:

Two basic kinds of countries


Why does one country have a comparative advantage in one area1
Why does one country have a comparative advantage in one area?

  • Heckscher-Ohlin:

  • Compared to the availability of capital & labor in one country, another country will have relatively more or less

  • Capital-abundant countries: Cost of capital relative to wages is lower

  • Labor-abundant countries: Wages relative to cost of capital is lower

  • H-O suggests that countries have an advantage in producing different commodities because of the different factor endowments of countries and the different mixtures of these factors involved in production of different commodities

    Question regarding “relatively capital abundant” vs “relatively labor abundant” … “relative” to what?

  • Other countries? Or relative to the other factor?

  • (Both)


Recall a key point
Recall a key point area?

  • What drives comparative advantage?

  • It is not differences in the cost of any single factor of production,

  • but differences in the cross-national relative-abundance

  • and thus the cross-national relative costs of factors of production

  • So, even if Americans can make more shoes and more computers (absolute advantages in both), they should still shift to exporting computers and importing shoes


So why is there protectionism
So why is there protectionism? area?

  • We’ll talk about Stolper-Samuelson and LOSERS from trade next time

  • For now… prisoner’s dilemma?

  • Discuss – is unilateral trade opening advantageous?


Pd settings
PD settings? area?

  • Prisoner's dilemma

  • http://www.youtube.com/watch?v=ED9gaAb2BEw&feature=related

  • http://www.youtube.com/watch?v=p3Uos2fzIJ0


Prisoner s dilemma
Prisoner's Dilemma: area?

  • A non-cooperative, non-zero-sum game. (Mixed game of cooperation and conflict.)

  • Individual rationality brings about collective irrationality.


The political economy of international trade cooperation

Example… area?

  • You're reading Tchaikovsky's music on a train back in the USSR.

  • KGB agents suspect it's secret code.

  • They arrest you & a "friend" they claim is Tchaikovsky.

  • "You better tell us everything. We caught Tchaikovsky, and he's already talking…"


The political economy of international trade cooperation


The political economy of international trade cooperation

Player 2’s “sucker’s payoff” area?

Player 1’s “sucker’s payoff”

Pareto optimal

Nash equilibrium

(Pareto sub-optimal)


The political economy of international trade cooperation

  • Pareto optimality: area?

    • No one can be made better off without someone being made worse off

    • Any change to make any person better off would make someone else worse off

  • Nash equilibrium:

    • Every individual pursues his best strategy set, given the strategies of all other players

    • No one would unilaterally defect

    • If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium


Individual rationality collective sub optimality
Individual rationality area? collective sub-optimality

  • The same situation can occur whenever “collective action” is required

  • The collective action problem is also called the “n-person prisoner's dilemma”

  • Also called the “free rider problem”

  • “Tragedy of the commons”

  • All have similar logics and a similar result:

    • Individually rational action leads to collectively suboptimal results


Is cooperation ever possible in prisoner s dilemma
Is cooperation ever possible in Prisoner's Dilemma? area?

  • Yes 

    • In repeated settings

  • Axelrod, Robert M. 1984. The Evolution of Cooperation. New York: Basic Books.

  • Example set of strategies?

    • Tit-for-tat


Pd example from the book
PD Example from the book area?

  • Trade liberalization between US and China


The political economy of international trade cooperation

China: P,L>L,L>P,P>L,P area?

US: L,P>L,L>P,P>P,L


Root of the imbalance between china and us according to different theoretical approaches
Root of the imbalance between China and US area?according to different theoretical approaches


Root of the imbalance between china and us according to different theoretical approaches1
Root of the imbalance between China and US area?according to different theoretical approaches


Root of the imbalance between china and us according to different theoretical approaches2
Root of the imbalance between China and US area?according to different theoretical approaches


Root of the imbalance between china and us according to different theoretical approaches3
Root of the imbalance between China and US area?according to different theoretical approaches


Root of the imbalance between china and us according to different theoretical approaches4
Root of the imbalance between China and US area?according to different theoretical approaches


Next time

Next time… area?

Who loses from free trade?


Take homes
Take-homes area?

  • Building blocks

  • Consumption indifference curves

  • Production possibility frontiers

  • (Declining) Marginal Rate of Substitution

  • (Constant or Increasing) Marginal Rate of Product Transformation

  • Comparative advantage

  • Opportunity costs

  • Factor endowments

  • Hecksher-Ohlin Model

  • Prisoner’s dilemma

  • Sucker’s payoff

  • Tit-for-tat (cooperation possible in repeated PDs)

  • Nash equilibrium

  • Pareto sub-optimality


The political economy of international trade cooperation

Thank you area?WE ARE GLOBAL GEORGETOWN!