Theory Review

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Theory Review

• Global Trade and Finance

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Our Market International Trade
ROW Market
US S
US D
Exports
ROW Sx
ROW S
Imports
US Dm
ROW D
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• Classical trade theory. Smith-Ricardo, Heckscher
  -Ohlin, Stolper Samuelson
• How to trade beyond the Production-Possibilities
  Curve

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• Trading along TT, the UK and SA can
• consume outside their PPC.

Social choice (the CIC) will determine whether
the UK and SA will consume at C or D.
T
England
South Africa
.
.C
.
T
.
CIC
CIC
.
T
.
T
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Review Characteristics of Markets

• Pure Comp?
• Ease of entry, no L-R pure NR, many sellers, no
  differentiation

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Review Characteristics of Markets

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

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Review Characteristics of Markets

• Oligopoly?
• Few sellers, interdependence, policy uncertainty,
  struggle for market share, differentiation,
  non-price competition.

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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

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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

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• Modern Trade Theory
• Compare modern and classical theories

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

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

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• Why did the modern theory develop?
• What are its two pillars?
• Global markets
• A role for government

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

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• What did Krugman see as the possibilities for
  government intervention?

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

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• 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

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• 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?

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

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

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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
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Show the idea of VERs.