Big Issues and questions 1. 2. 3. 4. 5. 6. 7.

7. Globalization Economic Activities Global econ downturn Free trade and welfare (social well being) Protectionism and welfare Distribution of benefits and costs Developing and Advanced nations Migration (illegal from Mexico) Growth strategy Equity Issues Regional integration and multilateral

Introdution and Categories Micro: Incentives, choices, tradeoffs, marginal thinking, competition Macro: Integration, political, economics, productivity and growth Trade: Real sector, production, what/why we produce, with whom we trade Finance: Pecuniary (monetary), investment: Positive Scientific method: Observe particular facts, generalize hypothesis and test with new observations. All about assumption Normative Prescriptive: What should be If facts dont fit model, change model or change facts In neoclassical: efficiency is good. Player: Domestic: producers, consumers, government Foreign: producers, consumers, government Economic Investment: Borrow money to build things Financial Investment: Lending money to buy stock

Supply:

Physical PPF mRT

Demand Tastes + preferences Utility curves mRS

Ricardo: Labor productivity is the determinant. Two countries can have differences in demand and technology mRT=2.5. A has comparative adv for Y mRT=0.6. B has comparative adv for X

Terms of trade 2.5>tot>.6 Both countries are better off but not every indi is Terms of trade Equal sized countries depends on relative D Sm vs large country: small country has disproportionate benefit Gain from trade Static: Existing resources Higher output in total Higher incomes in export industries Import competing industries, mobility. But in recession, it becomes trade wars because nations want to protect their own workers

Dynamic: growth over time Income, savings, investment increase in productive facilities Costs drop for suppliers as many are competing to provide the best deals Economy of scale by specialization Import competing firm

Comparative advantage can be changed strategically CHAP 3 I. Factor endowment theory

X intensive in L Y intensive in K Based on labor/capital abundance II. Factor price Equalization

Before trade: if US(K/L)>brazil (K/L) Wage high R low Post trade: Wage low R high

Demand for labor decreases DL increases Dr increases DR decreases Equalization effect. It also happens to immigration. Either the goods or the factories move have the same effect. However, some resources are not mobile. Reasons for not complete equalization Labors are not identical Adjustment takes time (for example: technology transfer) Trade barrier III. Stopler Samuelson: Magnification Effect Change in factor price>change in product price If abundant in labor specialize in the labor intensive good. Price of that good goes up as export. W (return to labor) goes up. Price goes up 10%, income goes up 15% real income goes up 5% IV. Specific factors: Those are not mobile between industry

Factors specific to import competing industry lose.

V.

Wage inequality

Resources that effect wage inequality: International trade and technological improvement: Increase the demand for skilled labor, then increases wage inequality Immigration of unskilled workers: Supply of skill/unskill shifts left increase w inequality Education and training: Supply of skill increases decrease wage ratio. VI. Leontief Paradox: Due to the definition of capital: Machinery or human capital VII. Other Factors in Comparative Advantage A. Regulation: Some make US less competitive, though they are justified (clean air act). Some countries may ignore the environment cost and produce, race to the bottom B. Internal Economy of Scale as Q up and LRAC down: Extra incentive to specialize. Are small firms left behind? C. External Econ of Scale: Size of industry, geographic region. D. Overlapping Demand: Linder: Trade with similar countries, similar demand as similar per capita income. That does not rule out trade between rich and poor countries as in poor countries there exist rich people, but the overlap is relatively small. CHAP 4 Offshore Assembly US tariff applies only to value added not components Avoid (legal) vs Evade (illegal) Postpone tariff: bonded warehouse, not assessed till sold 5 yrs foreign trade zone (where you import material, assemble, and re-export with no tariff)

Measure welfare impacts of tariffs Consumer surplus = willingness to pay actual payment Titile Name Class Date Attach article