ECW3121 International Trade and Finance Lecture 7

1
ECW3121International Trade and FinanceLecture 7

2
Heckscher-Ohlin
Stolper-Samuelson
Factor Price Equalisation
Comparative Advantage
Trade Theory Study Guide 1
Rybzcynski
Absolute Advantage
Immiserising Growth
Mercantilism
International Trade and Finance
Balance Of Payments
Non Tariff Barriers
Foreign Exchange Markets
Interest Arbitrage
Tariffs
TradeBlocs
Finance Study Guide 3
Trade Policy Study Guide 2
International Resource Movements
Tools of the Trade Policy Analysis
Exchange rate theorems
3
Trade Policy
Tariffs
Import tariff - a tax or duty on Imports
4
Trade Policy
General assumptions

• Perfect competition
• Perfect substitution between the imported
  and locally produced commodity
• The domestic supply curve is less than perfectly
  elastic
• The tariff does not eliminate all imports.

5
Trade Policy
Large Nations
Assumptions

• Perfect competition
• Perfect substitution between the imported
  and locally produced commodity
• The domestic supply curve is less than perfectly
  elastic
• The tariff does not eliminate all imports.

• The foreign supply curve is not perfectly
  elastic both the importer and the exporter are
  price makers

6
Trade Policy
Tariffs
Large Nations
Partial Equilibrium
International Market
Nation 1
Nation 2
Px Py
Px Py
Px Py
Sx
Sx
Sm t
Sm
Pt
Pt
Exports
t
Imports
P
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
Qt
7
Trade Policy
Small Nation
Assumptions

• Perfect competition
• Perfect substitution between the imported
  and locally produced commodity
• The domestic supply curve is less than perfectly
  elastic
• The tariff does not eliminate all imports.

• The foreign supply curve is perfectly elastic at
  the world market place unlimited quantities can
  be purchased at the world price.

8
Trade Policy
Tariffs
Small Nation
Partial Equilibrium
Import Tariff
Pt Pw Tariff Qd - Qd decrease in
consumption Qs-Qs increase in
domestic production Qd-Qs the
remaining export (Qd-Qs) x Tariff
additional government revenue
P
S
Imports
Pt
Sf t
Pw
Sf
D
0
Qs
Qd
Qs
Qd
Q
9
Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis

• The study of the interdependence that exists
  among all markets in the economy.
• Consider interdependence between two commodities
  and two nation markets.

• Use Figure 4.3, 4.4 and 4.5
• Offer Curves - Reciprocal Demand Curves.
• Summary of Trading Activities in each nation
• Show clearly the terms and volume of trade.
• Includes Two Products, Two Nations and the
  resulting terms of trade.

10
Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Reciprocal Demand Curve

• Introduced by Marshall and Edgewoth.
• Shows, how much of its import commodity the
  nation demands for it to be willing to supply
  various amounts of its import commodity
• or nations wiliness to import and export at
  various relative commodity prices.
• Incorporates elements of both demand for import
  and supply of export.

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Offer Curve - Nation 1
Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Production - Nation 1
Trade - Nation 1
Y
Y
60
A
PA1/4
PA1/4
0
0
50
X
X
12
Offer Curve - Nation 1
Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Production - Nation 1
Trade - Nation 1
Y
Y
H
65
PH1/2
45
F
20
PA1/2
PA1/4
0
0
55
95
40
X
X
PA1
13
Offer Curve - Nation 1
Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Production - Nation 1
Trade - Nation 1
Y
Y
PE1
E
80
60
PH1/2
20
B
PA1/4
0
0
70
130
60
X
X
PA1
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Offer Curve - Nation 1
Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Production - Nation 1
Trade - Nation 1
Y
Y
PE1
E
80
60
PH1/2
20
20
B
PA1/4
0
0
70
130
40
60
X
X
PA1
15
Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 1
Production - Nation 1
Trade - Nation 1
Y
Y
PE1
E
80
60
PH1/2
20
20
B
PA1/4
0
0
70
130
40
60
X
X
PA1
16
Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 1
Offer curve - shows the willingness of the
nation to import and export at various relative
commodity prices
Y
Y
Offer Curve Nation One
PE1
E
80
H
65
60
60
A
PA1/4
PH1/2
45
F
20
20
PA1/2
B
PA1/4
0
0
50
55
70
95
130
40
60
X
X
PA1
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 2
Production - Nation 2
Trade - Nation 2
Y
PA 4
Y
PA 4
40
A
0
0
80
100
X
X
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 2
Production - Nation 2
Trade - Nation 2
Y
Y
PH 2
PH 2
F
85
H
40
45
0
0
85
65
20
X
X
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 2
Production - Nation 2
Trade - Nation 2
Y
Y
PE 1
120
PE 1
B
60
E
60
0
0
40
100
X
X
60
20
Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 2
Production - Nation 2
Trade - Nation 2
Y
PA 4
Y
PA 1
PH 2
120
PE 1
B
60
E
Offer Curve Nation 2
60
0
0
40
100
X
X
60
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 2
Production - Nation 2
Trade - Nation 2
Y
PA 4
Y
PA 1
PH 2
PH 2
PE 4
120
PE 1
B
F
85
60
E
60
H
40
45
40
A
0
0
85
40
80
65
100
20
X
X
60
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Equilibrium
Equilibrium - corresponds to the point of
intersection of both offer curves.
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Trade Policy
Tariffs
Large Nations (Figure 8.6)
General Equilibrium

• Before imposition of tariff offer curves
  intersected at the equilibrium point.
• Nation 2 exchanged 60Y for 60X AT Px/Py1

Y
Nation 1
Nation 2
PE1
60
E
40
0
20
X
60
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Trade Policy
Tariffs
Large Nations (Figure 8.6)
General Equilibrium

• Nation 2 imposes (100) tariff on its import of
  commodity X.
• At the world price ratio 1/1 Nation 1 sees it as
  2/1. That is 60 units of Y buy only 30 units of
  X.
• Now, for any amount of exported commodity Y
  nation 2 is willing to import less of commodity
  X.
• The offer curve of the nation 2 is now rotated
  clockwise to the new (brown) position.
• At the new equilibrium point E the relative
  price for commodity X (PX/PY0.8) is lower.
• Relative price for commodity Y (PY/PX1.25) is
  higher.
• Nation 2 exchanges 40Y for 50X (buys cheaper,
  improves its position, but the volume of trade
  declines.
• Overall welfare effect is uncertain.

Y
Nation 1
Nation 2
PE1
60
E
PD1.25
D
Nation 2
40
E
H
PE0.8
30
0
60
50
20
X
25
Trade Policy
Tariffs
Large Nations (Figure 8.6)
General Equilibrium

• Before imposition of tariff offer curves
  intersected at the equilibrium point.
• Nation 2 exchanged 60Y for 60X AT PX/PY1
• Nation 2 imposes (100) tariff on its import of
  commodity X.
• Now, for any amount of exported commodity Y
  nation 2 is willing to import less of commodity
  X.
• The offer curve of the nation 2 is now rotated
  clockwise to the new (brown) position.
• At the new equilibrium point E the relative
  price for commodity X (PX/PY0.8) is lower.
• Relative price for commodity Y (PY/PX1.25) is
  higher.
• Nation 2 exchanges 40Y for 50X (buys cheaper,
  improves its position, but the volume of trade
  declines.
• Overall welfare effect is uncertain.

Y
Nation 1
Nation 2
PE1
60
E
PD1.25
D
Nation 2
40
E
H
PE0.8
30
0
60
50
20
X
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Trade Policy
Non Tariff Barriers
Import Quotas
Export subsides

• A direct quantitative restriction on import of a
  particular commodity

• Granting
• tax relief and/or subsidised loans to potential
  exporters or
• low-interest loans to foreign buyers of the
  nations export.

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Reading
Trade Policy
Non Tariff Barriers

• Salvatore - Chapter 9

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Trade Policy
Non Tariff Barriers
Import Quotas
Small Nation
P
S
Pw
Sf
D
0
Q
29
Trade Policy
Non Tariff Barriers
Import Quotas
Small Nation
P
S
quota
Pw
Sf
D
0
Q
30
Trade Policy
Non Tariff Barriers
Import Quotas
Small Nation
P
S
quota
Pw
Sf
D
0
Total Supply
Total Demand
Q
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Trade Policy
Non Tariff Barriers
Import Quotas
Small Nation
Qd - Qd decrease in
consumption Qs-Qs increase in
domestic production Qd-Qs the remaining
import
P
S
Pd
quota
Pw
Sf
D
Total Supply Total Demand
0
Qs
Qd
Qs
Qd
Q
32
Trade Policy
Non Tariff Barriers
Import Quotas
Small Nation
Where the revenue is going, at the quota regime,
that went to the budget at the tariff regime?
P
S
Pd
Pw
Sf
D
0
Q
Total Supply Total Demand
Tariff
Quota
33
Trade Policy
Non Tariff Barriers
Import Quotas
large Nation
34
Trade Policy
Non Tariff Barriers
Import Quotas
large Nation
International Market
Nation 1
Nation 2
Px Py
Px Py
Px Py
Sm
Sx
Sx
Sm
Pq
P
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
Qq
35
Trade Policy
Non Tariff Barriers
Import Quotas
large Nation
International Market
Px Py
Nation 1
Nation 2
Px Py
Px Py
Sm
Sx
Sx
Sm
Pq
Exports
Imports
P
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
Qq
36
Trade Policy
Non Tariff Barriers
Export subsidies
Small Nation
Px
Sx
Exports
Pw
Df
Dx
Qx
0
Qs
Qd
37
Trade Policy
Non Tariff Barriers
Export subsidies
Small Nation
Px
Sx
Df s
Pw s
Exports
Pw
Df
Dx
Qx
0
Qs
Qd
38
Trade Policy
Non Tariff Barriers
Export subsidies
Small Nation
Px
Sx
Df s
Pw s
Exports
Pw
Df
Dx
Qx
0
Qs
Qd
Qd
Qs
39
Trade Policy
Non Tariff Barriers
Export subsidies
Small Nation
Px
Sx
Exports
Df s
Pw s
Exports
Pw
Df
Dx
Qx
0
Qs
Qd
Qd
Qs
40

Trade Policy
Non Tariff Barriers
Export subsidies
Small Nation
What happens to the produce and consumer
surpluses as a result of the introduction of the
export subsidy?
Px
C.S.
Sx
Exports
P.S.
Pw
Df
Dx
Qx
0
41
Trade Policy
Non Tariff Barriers
Export subsidies
Large Nation
International Market
Px Py
Nation 1
Nation 2
Px Py
Px Py
Sx
Sx
Sm
Pe
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
42
Trade Policy
Non Tariff Barriers
Export subsidies
Large Nation
International Market
Px Py
Nation 1
Nation 2
Px Py
Px Py
Sx
Sx
Sm
Sm s
Pe
s
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
43
Trade Policy
Non Tariff Barriers
Export subsidies
Large Nation
International Market
Px Py
Nation 1
Nation 2
Px Py
Px Py
Sx
Sx
Sm
Sm s
Pe
Ps
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
Qs
44
Trade Policy
Non Tariff Barriers
Export subsidies
Large Nation
International Market
Px Py
Nation 1
Nation 2
Px Py
Px Py
Sx
Sx
Sm
Sm s
s
Pe
Ps
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
Qs
45
Trade Policy
Non Tariff Barriers
Export subsidies
Large Nation
International Market
Px Py
Nation 1
Nation 2
Px Py
Px Py
Sx
Sx
Sm
Exports
Sm s
s
Pe
Ps
Imports
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
Qs
46
Trade Policy
Non Tariff Barriers
Welfare EffectsFree Trade
Export subsidies
Large Nation
International Market
Px Py
Nation 1
Nation 2
Px Py
Px Py
Sx
Sx
Sm
C.S.
C.S.
Pe
P.S.
P.S.
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
47
Trade Policy
Non Tariff Barriers
Welfare EffectsExport subsidy
Export subsidies
Large Nation
International Market
Px Py
Nation 1
Nation 2
Px Py
Px Py
Sx
Sx
Sm
C.S.
C.S.
Sm s
Pe
Ps
P.S.
P.S.
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
Qs