Transcript Chapter 1 Introduction Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R.

Chapter 1
Introduction
Prepared by Iordanis Petsas
To Accompany
International Economics: Theory and Policy, Sixth Edition
by Paul R. Krugman and Maurice Obstfeld




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

What is
International Economics About?
International economics deals with economic interactions that
occur between independent nations.
There are several issues that recur throughout the study of
international economics: Gains from trade, The Pattern of Trade, Protectionism, How
Much Trade?, The Balance of Payments, Exchange Rate
Determination, International Policy Coordination, and the
International Capital Market.
The most important themes for this academic year (2011-2012)
are:
Gains from trade
Protectionism
The International Capital Market
Slide 1-2
The Gains from Trade

What exactly do people gain when they trade with one
another?

Comparative advantages and specialization. As the theory
of comparative advantage states, a country can increase its
standard of living by specializing in what it can make at low
opportunity cost and trading for what it can make only at high
price. The theory of comparative advantage also shows that
total production in both countries increases with specialization.

Increased variety of goods. Free trade gives consumers in all
countries greater variety from which to choose (German car
versus American car).
Slide 1-3
The gains from trade


Lower costs through economies of scale. Some goods
can be produced at low cost only if they are produced in
large quantities—a phenomenon called economies of
scale. Free trade gives firms access to larger world
markets and allows them to realize economies of scale
more fully.
Increased competition. Opening up trade fosters
competition and gives the invisible hand a better chance to
work its magic. It restricts the ability of domestic
companies to have market power, which in turn gives it
the ability to raise prices above competitive levels.
Slide 1-4
The Gains from Trade
 Enhanced
flow of ideas. With specialization and trade,
the total sum of knowledge used in an economy increases
tremendously and far exceeds that of any one brain.
Without trade, the knowledge used by an entire economy
is approximately equal to the knowledge used by one
brain.

Slide 1-5
THE WINNERS AND LOSERS
FROM TRADE
 The Gains and Losses of An Exporting country.
 The main two conclusions:
 When a country allows trade and becomes an

exporter of a good, domestic producers of the good
are better off, and domestic consumers of the good
are worse off.
Trade raises the economic well-being of a nation in
the sense that the gains of the winners exceed the
losses of the losers.
Slide 1-6
What is
International Economics About?
Slide 1-7
 The Gains and Losses of an Importing Country.
• When a country allows trade and becomes an importer of a good, domestic
consumers of the good are better off, and domestic producers of the good are worse off.
• Trade raises the economic well-being of a nation in the sense that the gains of the
winners exceed the losses of the losers.
Slide 1-8
The Lessons for Trade Policy in
Isoland country



Question (1): If the government allows a Isolandians to import and export
textiles, what will happen to the price of textiles and the quantity of textiles sold
in the domestic textile market?
Answer: Once trade is allowed, the Isolandian price of textiles will be driven to
equal the price prevailing around the world. If the world price is now higher
than the Isolandian price, our price will rise. The higher price will reduce the
amount of textiles Isolandians consume and raise the amount of textiles that
Isolandians produce. Isoland will, therefore, become a textile exporter. This
occurs because, in this case, Isoland has a comparative advantage in producing
textiles.
Conversely, if the world price is now lower than the Isolandian price, our price
will fall. The lower price will raise the amount of textiles that Isolandians
consume and lower the amount of textiles that Isolandians produce. Isoland will,
therefore, become a textile importer. This occurs because, in this case, other
countries have a comparative advantage in producing textiles.
Slide 1-9
 Question:

Who will gain from free trade in textiles
and who will lose, and will the gains exceed the
losses?
Answer: The answer depends on whether the price
rises or falls when trade is allowed. If the price rises,
producers of textiles gain, and consumers of textiles
lose. If the price falls, consumers gain, and producers
lose. In both cases, the gains are larger than the
losses. Thus, free trade raises the total welfare of
Isolandians.
Copyright © 2003 Pearson Education, Inc.
Slide 1-10


Question: Should a tariff be part of the new trade policy?
Answer: A tariff has an impact only if Isoland becomes a
textile importer. In this case, a tariff moves the economy closer
to the no-trade equilibrium and, like most taxes, has
deadweight losses. Although a tariff improves the welfare of
domestic producers and raises revenue for the government,
these gains are more than offset by the losses suffered by
consumers. The best policy, from the standpoint of economic
efficiency, would be to allow trade without a tariff. We hope
you find these answers helpful as you decide on your new
policy.
Slide 1-11
Key terms










Comparative advantage
Absolute advantage
Child labor
Export
Import
Domestic producers
Foreign producers
Specialization
Knowledge
Information
Slide 1-12
Chapter 2: Arguments against
International Trade (Protectionism)
 Trade
and jobs. Trade does eliminate jobs, Because
domestic factories cannot compete with foreign
industries.
 Child labor . Another justification of restricting trade is
that some companies in the exported country have
employed child workers to produce its products. Thus,
some claim that importing any goods that made by
children under the age of 15 must be prohibited.
Slide 1-13
 Trade

and National Security. some argue that
restrictions are necessary to avoid any imported
goods which may badly affect the health of people (In
1918, more than a quarter of the U.S. population got
sick with flu and more than 500,000 died).
Key Industries. Another argument is the "it is better
to produce computer chips than potato chips"
argument. The idea is that the production of computer
chips is a key industry because it generates spillovers,
benefits that go beyond the computer chips
themselves.
Slide 1-14
 Strategic Trade Protectionism.
 Sometimes, the government use
tariffs and quotas to
help domestic firms to act like a cartel when they sell to
international buyers. Oddly, the way to do this is to
limit or tax exports. A tax or limit on exports reduces
exports but can drive up price enough so that net
revenues increase.
Slide 1-15
The Instruments of Trade Policy





The tariff. A tariff is simply a tax (duty) levied on a product
when it crosses national boundaries.
The most widespread tariff is the import tariff, which is a tax
levied on an imported product. A less common tariff is an
export tariff, which is a tax imposed on an exported product.
Export tariffs have often been used by developing nations.
Two purposes of tariff:
A protective tariff: it is designed to reduce the amount of
imports entering a country, thus insulating import-competing
producers from foreign competition.
A revenue tariff: it is imposed for the purpose of generating tax
revenues and may be placed on either exports or imports.
Slide 1-16
Other Instruments of Trade Policy



Export Subsidies. An export subsidy is a payment to a firm or
individual that ships a good abroad.
Import Quotas. An import quota is a direct restriction on the
quantity of some good that may be imported. The restriction is
usually enforced by issuing licenses to some group of
individuals or firms.
For example, the United States has a quota on imports of
foreign cheese. The only firms allowed to import cheese are
certain trading companies; the size of each firm's quota is based
on the amount of cheese it imported in the past.
Slide 1-17
KEY TERMS





protection.
export restraint.
export subsidy.
import quota.
specific tariff.
Copyright © 2003 Pearson Education, Inc.
Slide 1-18
Trade Policy in Developing Countries
Prepared by Iordanis Petsas
To Accompany
International Economics: Theory and Policy, Sixth Edition
by Paul R. Krugman and Maurice Obstfeld
Infant Industry argument
1- According to the infant industry argument, developing countries
have a potential comparative advantage in manufacturing, but new
manufacturing industries in developing countries cannot initially
compete with well-established manufacturing in developed countries.
Thus, it makes sense, according to this argument, to use tariffs or
import quotas as temporary measures to get industrialization started.
َ
َ
Comparative advantage ‫طيومينتة والتاني تازة َثيطةيشتو ميزةي نسبيان‬
‫بةثيي ئةم ئار‬
‫) بةالم ثيشةسازي مانيفاكتؤرة لةم والتانةدا تواناي‬Manufacture( ‫هةية لة مانيفاكتؤرةدا‬
َ ‫بركيي نيية لةطةل ثيشةسازية‬
َ ‫كي‬
َ
.‫بةهيزةكاني والتاني َثيشكةوتو‬
َ ،‫بؤية مةعقوليةتي َتيداية‬
‫) كة حكومةت لةم‬Make sense( ‫جيطاي باوةر َثي َهينان و قبولكردنة‬
َ )‫) (حصص‬Import qoutas( ‫) يان ثشكي هاوردة‬tariffs( ‫قؤناغةدا طومرط‬
‫دابنيت بؤ ئةوةي‬
.‫بةثيشةسازيكردن دةست َثيبكات‬
Slide 11-20
‫‪2- Another reason why infant industry protection may be a good idea is‬‬
‫‪imperfect capital markets: developing countries do not have a set of‬‬
‫‪financial institutions that would allow savings from traditional sectors to be‬‬
‫‪used to finance investment in new sectors.‬‬
‫‪ ‬هؤكارَيكي تر كة بؤض ي ثارَيزطاريكردن لة ثيشةسازي ساوا رةنطة ئايديايةكي باش َبيت بريتية لة ناتةواوي‬
‫بازاري سةرماية‪ :‬والتاني تازة َثيطةيشتو دامةزراوةي داراييان نيية بة َ‬
‫شيوةيةك هاني ثاشةكةوت بدات لة‬
‫يهي َ‬
‫سيكتةري َ‬
‫نويدا بةركار َ‬
‫هينان لة َ‬
‫سيكتةري تةقليدييدا تا بؤ دارايي وةبةر َ‬
‫َ‬
‫نريت‪.‬‬
‫‪Thus the first-best policy is to create a better capital market, the second‬‬‫‪best policy is to protect new industries, which would raise profits and thus‬‬
‫‪allow more rapid growth‬‬
‫بؤية يةكةم‪-‬باشترين سياسةت بريتية لة دروستكردني بازار َييكي سةرمايةي باشتر‪ ،‬دووةم‪-‬باشترين سياسةت‬
‫بريتية لة ثارَيزطاريكردن لة ثيشةسازي نو َي‪ ،‬كة قازانج زياد دةكات و رَيطادةدات طةشة َ‬
‫خيراتر َبيت‪.‬‬
‫‪Slide 11-21‬‬
‫‪3- The problem of spillover: The idea is firms in a new industry generate‬‬
‫‪social benefits for which they are not compensated. Pioneering firms may, in‬‬
‫‪addition to producing physical output, create intangible benefits (such as‬‬
‫‪knowledge or new markets) in which they are unable to establish property‬‬
‫‪rights. In some cases the social benefits from creation of a new industry will‬‬
‫‪exceed its costs, yet because of the problem of spillover no private‬‬
‫‪entrepreneurs will be willing to enter.‬‬
‫‪‬‬
‫طرفتي سثيلؤظةر دةكر َي بة هؤكارَيكي تري ثشتطيري ئةم ئايدياية دابنرَيت‪ .‬ئايدياكة بريتية لةوةي‬
‫َ‬
‫كؤمثانياكان (ثرؤذةكان) لة ثيشةسازييةكي َ‬
‫َ‬
‫هةمدةهينن كة‬
‫نويدا‬
‫هةنديك كةلك يان سودي كؤمةاليةتي بةر‬
‫َ‬
‫ةبوناكرينةوة لةسةري‪ .‬ثرؤذة َثيشةنطةكان رةنطة‪ ،‬سةرباري ئةوةي بةرهةمي مادي دروست دةكةن‪،‬‬
‫قةر‬
‫َ‬
‫بةشيوةيةك كة ناتوانن مافي خاوةندارَيتي‬
‫سودي نةبينراو دروست بكةن (وةك زانين يان بازاري نو َي)‬
‫َ‬
‫َ‬
‫هةنديجار سودي كؤمةاليةتي دروستكردني ثيشةسازي نو َي َتيضونةكةي َتيدةثةرَي َنيت‪ ،‬بةالم‬
‫بثارَيزن‪.‬‬
‫شةنطيط لة كةرتي تايبةت ئامادة نيية َ‬
‫َ‬
‫بضيـتة ناو ئةم بازارةوة‪.‬‬
‫بةهؤي طرفتي سثيلؤظةوة هيض َثي‬
‫‪Slide 11-22‬‬
‫‪Problems with the Infant Industry‬‬
‫ِ ‪argument‬‬
‫‪‬‬
‫‪Economists have pointed out many pitfalls in the argument, suggesting‬‬
‫‪that it must be used cautiously. (What are the main problems with Infant‬‬
‫)?‪Industry argument‬‬
‫َ‬
‫هةنديك لة ئابوريناسان ئاماذة بة ضةندين مةترس ي شاراوة ‪ Pitfalls‬دةكةن كة ناضارمان دةكات زؤر بة‬
‫ورياييةوة مامةلة لةطةل ئةم سياسةتة بكةين‪ ،‬لةبةر ئةم هؤيانة‪:‬‬
‫‪‬‬
‫‪‬‬
‫‪‬‬
‫‪1- First, it is not always good to try to move today into the industries‬‬
‫‪that will have a comparative advantage in the future.‬‬
‫يةكةم‪ ،‬مةرج نيية هةميشة ئةوة باش َبيت كة هةولبدرَيت رو َ‬
‫بكريتة ثيشةسازييةك كة لة داهاتودا‬
‫ئةطةري ئةوة هةية ميزةي نسبي َ‬
‫هةبيت‪.‬‬
‫َ‬
‫ئؤتؤمبيل‪ .‬بةالم خؤ نةدةكرا لة‬
‫بؤ نمونة‪ :‬لة ‪ 1980‬كاندا كؤرياي باشور دةستي كرد بة هةناردةكردني‬
‫‪ 1960‬ةكاندا روبكاتة هةناردةكردني سةيارة و واز لةو ثيشةسازيانة َ‬
‫بهي َنيت كة ثشتي بة كار دةبةست لة‬
‫كاتيكدا ئةو كاتة دةستي كاري شارةزاي و سةرمايةي كةمبوو‪ .‬بةم ماناية‪ ،‬مةترسيةك لةم ئارطي َ‬
‫َ‬
‫ومينتة‬
‫َ‬
‫هةندي ثيشةسازي َ‬
‫َ‬
‫بهينين و ذيانمان بخاتة ضاوةروانييةوة بة‬
‫دةشيت هانمان بدات واز لة‬
‫ئةوةية كة‬
‫ئوميدي ئةوةي لة ئايندةدا ثيشةسازييةكانمان دةطةنة بازارةكاني جيهان و خؤشبةختي بؤ والت َ‬
‫َ‬
‫دةنيرنةوة‪.‬‬
‫‪Slide 11-23‬‬
‫‪Example‬‬
‫‪2- protecting manufacturing does no good unless the‬‬
‫‪protection itself helps make industry competitive.‬‬
‫‪ ‬دووةم‪ ،‬ثاراستني مانيفاكتؤرةكة مايةي دلخؤش ي نيية مةطةر ‪ unless‬خودي‬
‫ثارَيزطاريكردنةكة َ‬
‫ببيتة هؤي َ‬
‫بةهيزبوني تواناي َ‬
‫كي َ‬
‫بركي‪.‬‬
‫َ‬
‫هةنديك لة مانيفاكتؤرةكانيان‬
‫نمونة‪ :‬ثاكستان و هيند بؤ ضةند دةيةيةك قةلغانيان بة دةوري‬
‫دروست كرد‪ ،‬و بةم دواييةش زؤر لة بةرهةمةكاني ئةو مانيفاكتؤرانة طةيشتنة بازارةكاني جيهان‪.‬‬
‫َ‬
‫لةطةل ئةمةشدا (‪ ،)however‬ئةم بةرهةمانةي ئةوان دةيانناردة دةرةوة مانيفاكتؤرةي سوك‬
‫بون ‪ Light manufactures‬وةكو نةسيج‪ ،‬نةك بةرهةمي ئةو مانيفاكتؤرانةي كة قورس‬
‫بون ‪ heavy manufactures‬و ثارَيزطارييان َليدةكرا‪ .‬ئةم جياوازيية بة ئةندازةيةك بوو كة‬
‫هةر دةتوت ئةوان دةيانتواني ئةو شمةكانة َ‬
‫َ‬
‫هةنديك لة‬
‫بنيرنة دةرةوة َبي ئةوةي َثيويست بكات‬
‫مانيفاكتؤرةكانيان هةرطيز بثارَيزن ‪.if they had never protected manufacturing‬‬
‫‪Slide 11-24‬‬
‫‪3-‬‬
‫‪More generally, the fact that it is costly and time‬‬‫‪consuming to build up an industry is not an argument for‬‬
‫‪government intervention unless there is some domestic‬‬
‫‪market failure.‬‬
‫َ‬
‫طيومينتي ”بيناكردني ثيشةسازي نو َي َثيويستي بة كاتي زؤر‬
‫‪‬لة سةرو ئةمانةشةوة‪ ،‬ئار‬
‫و َتيضوني زؤر هةية و ئةمةش لة تواناي كةرتي تايبةتدا نيية“ بةس نيية بؤ ئةوةي‬
‫حكومةت دةستوةربداتة ئابورييةوة مةطةر بازاري ناوخؤيي لةو بوارةدا شكستي َ‬
‫هينا‬
‫َبيت ‪.unless there is some domestic market failure‬‬
‫‪‬ئةطةر ثيشةسازييةك دةستكةوتي زؤر دروست بكات و َ‬
‫بطي َريتةوة بؤ هةر يةك لة كار و‬
‫سةرماية و فاكتةرةكاني ديكة‪ ،‬بؤض ي كةرتي تايبةتي ئةم ضاالكية نةكات َبي هاوكاري‬
‫َ‬
‫حكومةت ‪without government help‬؟ َبيطومان داخلي ئةم جؤرة ثيشةسازيانةش‬
‫َ‬
‫ي‬
‫يكا‬
‫ئةمة‬
‫لة‬
‫مان‬
‫دة‬
‫ثيشةساز‬
‫وةك‬
‫ت‪،‬‬
‫دةبي‬
‫ر‬
‫ر‬
‫‪Slide 11-25‬‬

4- Both the imperfect capital markets argument and the spillover case are
clearly special cases of the market failures justification for interfering
with free trade. The difference is that in this case the arguments apply
specifically to new industries rather than to any industry.
َ
‫طيومينتي ناتةواوي بازاري سةرماية و سثيلؤظة بة روني بريتين لة كةيس ي تايبةتي شكستي بازار‬
‫ هةردوو ئار‬
َ
‫طيومينتة بةسةر‬
‫ جياوازيةكة ئةوةية كة ئةم ئار‬.‫كة بونةتة ثاساو بؤ دةستوةردان لة بازرطاني ئازاد‬
َ
َ ‫ثيشةسازي‬
.‫دةسةثيت و بةس نةك بؤ هةر ثيشةسازييةك‬
‫نويدا‬

However, in practice it is difficult to evaluate which industries really
warrant special treatment, and there are many stories of infant industries
that have never grown up and remain dependent on protection.
َ
‫بايةخيكي تايبةتي هةية‬
‫ لة ثراكتيكدا هةلسةنطاندني ئةو ثيشةسازيانةي َثيويستيان بة‬،‫ لةطةل ئةمةشدا‬
‫ و زؤر ضيرؤكيش هةية دةربارةي ثيشةسازي ساوا كة هةرطيز طةشةيان نةكرد و تا َئيستاش‬،‫ئاسان نيية‬
.‫ثشت بة ثارَي َزيطاريكردن دةبةستن‬
Slide 11-26
import-substituting industrialization.

It is the strategy of encouraging domestic industry by
limiting imports of manufactured goods through trade
restrictions (e.g. tariffs and quotas).

The 1950s and 1960s saw the high tide of importsubstituting industrialization. In the early 1970s, India's
supports other than oil were only about 3 percent of GDP.
Slide 11-27
 One might ask why a choice needs to be made. Why
not encourage both import substitution and exports?
 The
answer is a tariff that reduces imports also
necessarily reduces exports. By protecting importsubstituting industries, countries draw resources away
from actual or potential export sectors.
Slide 11-28
Why to choose import-substituting
strategy?

Many developing countries believed that industrialization was
necessarily based on a substitution of domestic industry for
imports rather than on a growth of manufactured exports.

In many cases, import-substituting industrialization policies
dovetailed (come together) naturally with existing political
bases (e.g. the Great Depression and the wartime disruption of
trade in 1940s).
Slide 11-29

Converse to export substitution, import substitution
directly benefited powerful, established interest groups.

Some argued that the international economic system
systematically works against the interests of developing
countries.

These arguments remained common until the 1980s.
Slide 11-30
DEVELOPING-NATION TRADE
CHARACTERISTICS
1- Trade among developing nations is relatively minor, although it
has increased in recent years
2- Developing nations are highly dependent on advanced nations. A
majority of developing-nation exports go to the advanced nations.
3- Another characteristic is the composition of developing-nations’
exports, with its emphasis on primary products (agricultural
goods, raw materials, and fuels). Of the manufactured goods that
are exported by developing nations, many (such as textiles) are
labor intensive and include only modest amounts of technology in
their production.
4- Finally, developing-nation imports originate in advanced nations
Slide 1-31