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Master conomie et Affaires Internationales

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International Trade with Partial Equilibrium Models and Optimization Strategies: ... with linear demand & supply curves can be mathematically derived easily ... – PowerPoint PPT presentation

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Title: Master conomie et Affaires Internationales


1
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
  • Master Économie et Affaires Internationales
  • Paris Dauphine November 2008
  • Dr. Ramón Mahía
  • Professor of Applied Economics Department
  • www.uam.es/ramon.mahia

2
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
STRUCTURE OF DOCUMENT AND EXPOSITION
  • Basic elements for understanding Partial
    Equilibrium Models
  • Closed economy
  • Do we need optimization?
  • A break for introducing Excel Solver
  • Open Economy
  • Basic concepts
  • Tradable / Non tradable Goods definition
  • Impact of trade measures example of tariffs

3
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
STARTING POINT CLOSED ECONOMY
  • Equilibrium with linear demand supply curves
    can be mathematically derived easily

4
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
STARTING POINT CLOSED ECONOMY
  • But it runs out to be very complex if linearity
    is lost

5
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
EXCEL SOLVER COMPLEMENT
  • The optimization problem should be written in an
    Excel worksheet as it could be solved by hand
  • The basic elements of an optimization problem
    are
  • Target function to maximize, minimize or to
    achieve a particular value
  • Input Variables / Parameters (cells) to move to
    achieve optimization target function
  • Constraints (restrictions) to be taken into
    account
  • Optimization algorithm definition

6
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY BASIC DEFINITIONS
  • We will use Partial Equilibrium Model with three
    assumptions
  • Single product with no substitutive items
  • Small country When our economy opens, the new
    international trade is NOT big enough to change
    international prices
  • Perfect competition Domestic prices
    automatically move to converge to international
    prices (financial parity prices)

7
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY BASIC DEFINITIONS
  • When an economy opens, an alternative market
    with a different price appears inducing a price
    competition with domestic market.
  • For a meaningful comparison between international
    market price and the domestic price received by
    farmers, we must adjust the price of the product
    in the international market at the same basis of
    the domestic prices these International prices
    thus adjusted are called financial parity prices.

8
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY BASIC DEFINITIONS
  • We calculate the financial export parity price
    by deducting from the border price (FOB in this
    case) all transport and marketing costs from the
    farm to the port, any export taxes or subsidies,
    and all local port charges including taxes,
    storage, loading agents' fees, etc., so as to be
    left with the farm-gate price.

9
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY BASIC DEFINITIONS
  • FOB stands for FREE ON BOARD. It is the cost of
    an export good at the exit point in the exporting
    country loaded in the ship (or other means of
    transport) in which it will be carried to the
    importing country. It is equal to the CIF price
    at the port of destination minus the cost of
    international freight, insurance and the
    unloading onto the destination dock.

10
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY BASIC DEFINITIONS
  • We calculate the financial import parity price
    by first choosing a domestic wholesale reference
    market, for instance the wholesale market of the
    capital city, where imported goods are supposed
    to enter into competition with locally produced
    equivalent goods.
  • We then add to the border price (CIF in this
    case) all port charges after the import touches
    the dock, any domestic tariffs and other taxes or
    fees, duties, and the transport and marketing
    costs from the port to the market of reference.
    If we further want to obtain the import parity
    price at the farm-gate, we subtract the transport
    and marketing costs that farmers have to pay to
    put their produce in the market of reference

11
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY BASIC DEFINITIONS
  • CIF stands for COST, INSURANCE AND FREIGHT. It
    is the landed cost of an import good on the dock
    or other entry point in the receiving country. It
    includes the cost of international freight and
    insurance and usually also the cost of unloading
    onto the dock. It excludes any charge after the
    import touches the dock such as port charges,
    handling and storage and agents' fees. It also
    excludes any domestic tariffs and other taxes or
    fees, duties or subsidies.

12
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY NON TRADABLE GOODS
  • Non tradable good. (1) Exporting the good is not
    justified the domestic price (Pd) is higher than
    the financial export parity price (Pep)

13
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY NON TRADABLE GOODS
  • Non tradable good. (2) Importing the good is not
    justified Financial import parity price of the
    good (pip) is higher than the domestic price (Pd)

14
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY NON TRADABLE GOODS
  • Non tradable good (1) the domestic price (Pd)
    is higher than the financial export parity price
    (Pep) and lower than financial export parity
    price (Pip)

15
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY EXPORTABLE GOODS
  • Exportable goods The financial export parity
    price "pep" is higher than the domestic price in
    the absence of trade, and hence there is an
    incentive for the good to be exported

16
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY EXPORTABLE GOODS
  • Exportable goods The financial export parity
    price Pep" is higher than the domestic price

17
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY EXPORTABLE GOODS
  • Main effects before opening economy for an
    exportable good
  • Domestic demand price tends to rise up to Pep so
    domestic demand is lower at this new price and
    consumer surplus reduces
  • Supply is higher at this prices
  • .going now to domestic and export markets
  • Producers gain more money and producers surplus
    grows

18
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY IMPORTABLE GOODS
  • Importable goods The financial import parity
    price of the good IS LOWER than the domestic
    price, so there is an incentive to import the good

19
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY IMPORTABLE GOODS
  • Importable goods The financial import parity
    price Pip" is lower than the domestic price

20
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY IMPORTABLE GOODS
  • Main effects before opening economy for an
    importable good
  • Consumers have an incentive to import at this new
    price
  • ..so domestic supply price tend to fall down to
    "Pip
  • Demand is higher at this new and lower prices
  • Coming from domestic producers but also from
    abroad
  • Domestic supply is lower at this new price
  • Producers lose some money
  • ..but public revenues are collected from imports

21
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY IMPACT OF TRADE MEASSURES
  • Which is the effects of a tariff measure in an
    open economy for an importable good?
  • We assume that the product is an importable good
    and we start from the previous situation of
    equilibrium with trade and no protection. The
    domestic price will be equal to the international
    price Pw. Then a tariff t is introduced as a
    percentage of the import value (ad-valorem
    tariff).
  • The tariff will generate a series of reactions
    over time from producers, consumers and traders
    until a new equilibrium is reached in the
    domestic market. Comparing the initial and final
    situations the effects of the tariff are the next

22
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY IMPORTABLE GOODS
  • Main effects of a tariff in an open economy
  • Domestic Prices Increases
  • ...and therefore, consumers expenditures reduces
  • .. and consumption reduces in volume
  • Higher prices encourages producers to increase
    their supply
  • that replaces imported supply
  • reducing dependency on imports
  • and generating a rise in revenues of producers
  • ... and goverment

23
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY OPTIMIZATION SCHEME
  • Now, I porpoise an optimization problem
  • Are we able to rise the tariff to restore the
    initial situation of a closed economy?
  • Objective function reduce to 0 dependency on
    imports
  • Parameters to move tariff level
  • Restrictions none

24
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
OPEN ECONOMY OPTIMIZATION SCHEME
  • Further complexity
  • Non linearity for every relation in the scheme
  • Non small country assumption
  • Non perfect competition
  • Importable and exportable good at the same time
  • Different trade measures for import and export
    and even non measurable measures
  • Matrixes different countries, different CIF and
    Fob prices, different transport costs,etc
  • Market distortions market power, dumping
    strategies, .

25
International Trade with Partial Equilibrium
Models and Optimization StrategiesA basic
Approach
REFERENCES
  • () José María Caballero. Geraldo Calegar and
    Carlo Cappi. 2000. Instruments of Protection and
    their economic Impact. Multilateral trade
    negotiations on agriculture a resource manual.
    FAO
  • de Janvry, A. Sadoulet, E. 1995. Quantitative
    Development Policy Analysis. Baltimore and
    London, The John Hopkins University Press
  • FAO. 1998. The Implications of Uruguay Round
    Agreement on agriculture for Developing countries
    - a Training Manual. Training Materials for
    Agricultural Planning, No. 41. Rome.
  • Gittinger, P J. 1982. Economic Analysis of
    Agricultural Projects. Second Edition. Baltimore
    and London, John Hopkins University Press.
  • Josling, T. E., Tangermann, S. Warley, T. K.
    1996. Agriculture in the GATT. London, Macmillan
    Press.
  • Just, R., Hueth, D.L. Schmitz, A. 1982. Applied
    Welfare Economics and Public Policy.
    Prentice-Hall, N.J.
  • Tsakok, I. 1990. Agricultural Price Policy a
    Practitioner's Guide to Partial Equilibrium
    Analysis. Ithaca, New York, Cornell University
    Press.
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