International economics and policy

With decreasing costs of transporting goods and information, market forces, which guide the international flow of goods, assets, people, technology, and information, are becoming a dominant factor in the process of globalization as well as in international conflicts. For example, when markets link countries, domestic policies such as subsidies and environmental regulation in one country affect the welfare of other countries. The integrating force of the market is redefining boundaries beyond those of the traditional nation state.

International economics and policy

International trade[ edit ] Scope and methodology[ edit ] The economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively limited international mobility of the capital and labour.

Thus the methodology of international trade economics differs little from that of the remainder of economics. However, the direction of academic research on the subject has been influenced by the fact that governments have often sought to impose restrictions upon international trade, and the motive for the development of trade theory has often been a wish to determine the consequences of such restrictions.

Classical theory[ edit ] The theory of comparative advantage provides a logical explanation of international trade as International economics and policy rational consequence of the comparative advantages that arise from inter-regional differences - regardless of how those differences arise.

Since its exposition by David Ricardo [6] the techniques of neo-classical economics have been applied to it to model the patterns of trade that would result from various postulated sources of comparative advantage.

However, extremely restrictive and often unrealistic assumptions have had to be adopted in order to make the problem amenable to theoretical analysis. The best-known of the resulting models, the Heckscher-Ohlin theorem H-O [7] depends upon the assumptions of no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies.

On those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the relative abundance of labour and capital referred to as factor endowments.

The resulting theorem states that, on those assumptions, a country with a relative abundance of capital would export capital-intensive products and import labour-intensive products.

The theorem proved to be of very limited predictive value, as was demonstrated by what came to be known as the " Leontief Paradox " the discovery that, despite its capital-rich factor endowment, America International economics and policy exporting labour-intensive products and importing capital-intensive products [8] Nevertheless, the theoretical techniques and many of the assumptions used in deriving the H—O model were subsequently used to derive further theorems.

The Stolper—Samuelson theorem[9] which is often described as a corollary of the H—O theorem, was an early example. In its most general form it states that if the price of a good rises falls then the price of the factor used intensively in that industry will also rise fall while the price of the other factor will fall rise.

In the international trade context for which it was devised it means that trade lowers the real wage of the scarce factor of production, and protection from trade raises it.

Another corollary of the H—O theorem is Samuelson's factor price equalisation theorem which states that as trade between countries tends to equalise their product prices, it tends also to equalise the prices paid to their factors of production.

But, as noted below, that conclusion depends upon the unlikely assumption that productivity is the same in the two countries. Large numbers of learned papers have been produced in attempts to elaborate on the H—O and Stolper—Samuelson theorems, and while many of them are considered to provide valuable insights, they have seldom proved to be directly applicable to the task of explaining trade patterns.

It makes extensive use of econometrics to identify from the available statistics, the contribution of particular factors among the many different factors that affect trade. The contributions of differences of technology have been evaluated in several such studies.

Another econometric study also established a correlation between country size and the share of exports made up of goods in the production of which there are scale economies. There is a strong presumption that any exchange that is freely undertaken will benefit both parties, but that does not exclude the possibility that it may be harmful to others.

However on assumptions that included constant returns and competitive conditions Paul Samuelson has proved that it will always be possible for the gainers from international trade to compensate the losers.

The authors found the evidence concerning growth rates to be mixed, but that there is strong evidence that a 1 per cent increase in openness to trade increases the level of GDP per capita by between 0.

Those findings and others [17] have contributed to a broad consensus among economists that trade confers very substantial net benefits, and that government restrictions upon trade are generally damaging.

Factor price equalisation[ edit ] Nevertheless, there have been widespread misgivings about the effects of international trade upon wage earners in developed countries. As noted above, that theorem is sometimes taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the industrialised country.

However, it is unreasonable to assume that productivity would be the same in a low-wage developing country as in a high-wage developed country. A study has found international differences in wage rates to be approximately matched by corresponding differences in productivity.

It has been argued that, although there may sometimes be short-term pressures on wage rates in the developed countries, competition between employers in developing countries can be expected eventually to bring wages into line with their employees' marginal products.

Any remaining international wage differences would then be the result of productivity differences, so that there would be no difference between unit labour costs in developing and developed countries, and no downward pressure on wages in the developed countries.

Influential studies published in by the Argentine economist Raul Prebisch [20] and the British economist Hans Singer [21] suggested that there is a tendency for the prices of agricultural products to fall relative to the prices of manufactured goods; turning the terms of trade against the developing countries and producing an unintended transfer of wealth from them to the developed countries.

Their findings have been confirmed by a number of subsequent studies, although it has been suggested that the effect may be due to quality bias in the index numbers used or to the possession of market power by manufacturers.

The arguments for and against such a policy are similar to those concerning the protection of infant industries in general. Infant industries[ edit ] The term " infant industry " is used to denote a new industry which has prospects of gaining comparative advantage in the long-term, but which would be unable to survive in the face of competition from imported goods.

This situation can occur when time is needed either to achieve potential economies of scaleor to acquire potential learning curve economies. Average tariff levels of around 15 per cent in the late 19th century rose to about 30 percent in the s, following the passage in the United States of the Smoot—Hawley Tariff Act.

The restrictions that remain are nevertheless of major economic importance: That relieves some of the competitive pressure on domestic suppliers, and both they and the foreign suppliers gain at the expense of a loss to consumers, and to the domestic economy, in addition to which there is a deadweight loss to the world economy.

When quotas were banned under the rules of the General Agreement on Tariffs and Trade GATTthe United States, Britain and the European Union made use of equivalent arrangements known as voluntary restraint agreements VRAs or voluntary export restraints VERs which were negotiated with the governments of exporting countries mainly Japan —until they too were banned.

International economics and policy

Tariffs have been considered to be less harmful than quotas, although it can be shown that their welfare effects differ only when there are significant upward or downward trends in imports. The practice of international finance tends to involve greater uncertainties and risks because the assets that are traded are claims to flows of returns that often extend many years into the future.

Markets in financial assets tend to be more volatile than markets in goods and services because decisions are more often revised and more rapidly put into effect. There is the share presumption that a transaction that is freely undertaken will benefit both parties, but there is a much greater danger that it will be harmful to others.

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International Economics - School of Foreign Service - Georgetown University