IB Economics - International Economics

Terms in this set (80)

negative effect on export competitiveness: if production inputs are more expensive, the final good is more expensive & higher price for exports :-(
trade protection may give rise to trade wars: retaliation after one country imposes protectionist measures :-(
creates a potential for corruption: parallel/informal market (black market) for protected goods, bureaucrats might receive tariff revenues :-(
infant industry argument: an industry just beginning (infant) has high costs, which require protection from low-cost imports until the industry can mature and can achieve low cost production. Since future allocation of resources could be better if infant industry is protected.
-> E.g. electric car industry in USA protected from German imports.
BUT difficulties selecting industries which need protection & protection might be prolonged. :-/
diversification of developing countries: protection restricts imports of goods that a country wants to produce itself to increase variety of goods it produces.
-> diversification reduces vulnerability to fluctuation in prices (opposite of specialization)
-> E.g Venezuela being dependent on oil for 96% of its exports
BUT can be abused if a country cannot produce good at low cost. :-/
National security: If there is a war, a country needs to be self sufficient in essential goods for defense
-> E.g. weapons, aircraft
BUT can be used as hidden protection (e.g. candle, gloves in the US) :-/
Health, safety, environmental standards:
e.g. "Kinder Surprise" chocolate eggs are deemed dangerous in USA so the imports of the goods are restricted.
BUT this reason may be abused to protect domestic industry. :-/
Anti-dumping:
-> Dumping: occurs when imported goods are sold below cost of production. The WTO deems dumping illegal. So if a country is suspected of dumping, trade protection is justified.
BUT dumping is difficult to prove creating room for unjustified protection. :-/
Means to overcome balance of payments deficits: When more money is leaving a country than entering it trade protection can be used to counter this deficit.
BUT can lead to trade wars resulting in even less export revenue. :-/
Changes in exchange rate affect inflation:
(a) Cost-push inflation: currency depreciation makes imports more expensive => cost of imported FoP increase => leftward shift of the SRAS curve & cost-push inflation.
(b) Demand-pull inflation: currency depreciation makes exports cheaper & imports more expensive => net exports (X − M) increase => rightward shift of the AD curve & demand-pul inflation.
Effects on employment: (i) if the economy is close to potential GDP, the increase in AD (due to higher net exports) may cause a temporary decrease in natural unemployment; (ii) if the economy is in a recessionary gap a rise in AD causes a fall in cyclical unemployment.
Effects on economic growth: in the case of a currency appreciation, economic growth results (due to the above consequences of growing net exports).
Currency appreciation (by directly reducing
net exports) is likely to damp economic growth. However, since a currency appreciation makes imports cheaper, there may result increased imports of FoP that can be used to increase private or government investment spending and therefore impact positively on potential output.
Effects on the current account balance: if a country has an excess of imports over exports to begin with (a trade 'deficit'), there will be downward pressure on the currency, leading to depreciation which will reduce the deficit. If it has an excess of exports over imports to begin with (a trade 'surplus'), its trade surplus become larger. An appreciation, by contrast, will cause net exports to fall, thus having the opposite effects on the current account balance.
Causes of changes in the short term
Changes in global demand: increases in global demand for a product cause its price to increase; decreases in global demand cause its price to fall (e.g. change in consumer tastes).
Changes in global supply: availability of important inputs in production (e.g. increase in the price of oil ToT+ for oil exporters & ToT- for oil importers).
Changes in the domestic rate of inflation relative to other countries: higher rate of domestic inflation means the country's export prices increase relative to its import prices => country's ToT+; at the same time ToT- of countries that import goods from the high inflation country.
Changes in exchange rates: if a country's currency appreciates ToT+; if a country's currency depreciates ToT-.
Causes of changes in the long term
Growth in incomes, affecting global demand: as incomes increase, the prices of food and other primary products rise less rapidly than the prices of manufactured goods/services (due to YED) => countries that export manufactured goods & import primary products have been experiencing improving ToT over many years, whereas countries that export mainly primary products & import manufactured products have been facing deteriorating ToT over long periods of time.
Changes in productivity: if productivity increases occur in industries producing goods for export, the ToT will likely deteriorate as export prices fall relative to import prices.
Trade protection: subsidies granted by large producers of a good may result in an increase in global supply and hence a fall in its price.
-> subsidies granted by the US and EU on their agricultural products have the effect of increasing global supply and depressing world prices => exporters of the same products (i.e. developing countries) therefore face deterioration in their ToT as the price of their export goods falls.
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