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name: trade-economics description: International trade — comparative advantage, trade policy. Cover Ricardo, H-O, tariffs, WTO, GVCs.
Ricardian Model — Comparative Advantage:
A country should specialize in and export goods where it has the
LOWEST OPPORTUNITY COST, not the lowest absolute cost.
Example:
Wine (hours/unit) Cloth (hours/unit)
Portugal 80 90
England 120 100
Portugal: Opportunity cost of wine = 80/90 = 0.89 cloth
England: Opportunity cost of wine = 120/100 = 1.20 cloth
Portugal has comparative advantage in wine (lower opportunity cost)
England has comparative advantage in cloth
Both countries gain from trade even though Portugal is more
efficient at producing BOTH goods (absolute advantage in both)
Key insight: Trade is driven by relative (not absolute) productivity differences. Even the least productive country has a comparative advantage in something.
Factor proportions theory:
Key predictions:
Leontief Paradox: The US (capital-abundant) exported labor-intensive goods in the 1950s — contradicting H-O predictions. Explanations: human capital, technology differences, natural resources.
Economies of scale and imperfect competition:
Tariffs:
Effects of an import tariff:
- Consumer surplus: Decreases (higher prices)
- Producer surplus: Increases (domestic producers benefit from protection)
- Government revenue: Increases (tariff revenue = t x M)
- Net welfare effect: Negative for small countries (deadweight loss)
Potentially positive for large countries
(terms of trade improvement may exceed deadweight loss)
Effective rate of protection:
ERP = (VA_t - VA_f) / VA_f x 100%
VA_t = Value added under tariff protection
VA_f = Value added under free trade
Tariff escalation: Higher tariffs on processed goods than raw materials
→ ERP on processing can be much higher than nominal tariff rate
Non-tariff barriers:
| Instrument | Mechanism | WTO Status |
|---|---|---|
| Import quota | Quantity restriction on imports | Generally prohibited |
| Voluntary export restraint | Exporter limits own exports | Prohibited since Uruguay Round |
| Anti-dumping duty | Duty on imports sold below "normal value" | Permitted under WTO rules |
| Countervailing duty | Duty to offset foreign subsidies | Permitted with investigation |
| Technical barriers (TBT) | Product standards, labeling | Permitted if non-discriminatory |
| Sanitary/phytosanitary (SPS) | Health and safety standards | Permitted if science-based |
| Local content requirements | Minimum domestic input share | Prohibited under TRIMs |
| Government procurement | Preferences for domestic suppliers | Covered by GPA (plurilateral) |
Core principles:
Trade agreements hierarchy:
Depth of integration (ascending):
1. Preferential trade agreement (PTA): Reduced tariffs on selected goods
2. Free trade agreement (FTA): Zero tariffs on substantially all trade between members
3. Customs union: FTA + common external tariff (e.g., EU, Mercosur)
4. Common market: Customs union + free movement of factors (labor, capital)
5. Economic union: Common market + harmonized economic policies
6. Monetary union: Economic union + single currency (Eurozone)
Concept: Production fragmented across countries — each country performs specific tasks/stages rather than producing complete goods.
GVC metrics:
Trade in value added (TiVA):
Gross exports overstate bilateral trade imbalances when GVCs are involved.
Example: iPhone assembled in China using components from Japan, Korea, US
Gross export value (China → US): $300
Chinese value added: $10 (assembly labor and margin)
Actual bilateral value added: Much smaller than gross trade data suggests
TiVA adjusts for this by tracking where value is actually created.
GVC risks:
Terms of Trade (ToT) = Price of Exports / Price of Imports x 100
ToT improvement: Export prices rise relative to import prices
→ Country can buy more imports for each unit of exports
→ Real income gain
ToT deterioration: Import prices rise relative to export prices
→ Country needs to export more to buy same imports
→ Real income loss
Commodity exporters: ToT highly volatile, driven by commodity price cycles
Manufacturing exporters: ToT more stable, but subject to competitive pressure
Policy measure: __________ Country: __________
Before After Change
Applied tariff rate ____% ____% ____%
Import volume _________ _________ ____%
Import value _________ _________ ____%
Domestic production _________ _________ ____%
Consumer price _________ _________ ____%
Welfare effects (annual):
Consumer surplus change: _________
Producer surplus change: _________
Government revenue change: _________
Net welfare effect: _________
Employment impact:
Protected sector: +/- _________ jobs
Downstream industries: +/- _________ jobs
Export sectors (retaliation risk): +/- _________ jobs
Country: __________ Period: __________ Currency: __________
Amount % of GDP
Goods exports _________ ____%
Goods imports (_________) ____%
Trade balance (goods) _________ ____%
Services exports _________ ____%
Services imports (_________) ____%
Trade balance (services) _________ ____%
Current account balance _________ ____%
Top export destinations: 1. __________ 2. __________ 3. __________
Top import sources: 1. __________ 2. __________ 3. __________
Export concentration (HHI): _________