|1. Absolute vs. Relative Prices|
|Goal||Lay the groundwork for two trade theories|
|Cutting off external trade relations causes a dramatic change in the prices of traded goods. Policies that restrict international trade such as tariffs and quotas also significantly affect the prices of traded goods. To lay the basis for our discussion through the course, we first consider how foreign prices are converted into domestic prices so that home consumers can compare the prices of imported and domestic goods.|
|Conversion of foreign prices|| Domestic price of a commodity (p$) = $/unit
Foreign price of a commodity (p€) = €/unit (or yuan/unit)
Exchange Rate e (dollar price of a foreign currency) = $/€ (or $/yuan)
Domestic price of an imported good
= p$ = e × p€ (or e ×pyuan)
= ($/€)(€/unit) = $/unit.
The Law of One Price
|One price prevails, provided No Transportation Costs +
No Trade Restrictions.
Given the exchange rates, one can obtain the dollar price of any good.
If p < p*, then export the good. This raises p until p = p*
|when t > 0||
If transportation cost t is positive, the law of one price does not prevail.
p = p* + t.
|Absolute prices||Assume N goods: 1, 2,...,N.
(p1, p2,..., pN). N absolute prices.
(p1/pN, p2/pN,...,1). (N-1) relative prices.
You may use another good as a standard instead of good N.
2- good case
|AP: p1, p2.
HDTV = $2,000. Corn price = $4 per bushel.
p1/p2 = 500. Relative price changes
over time. Now HDTV = $1,000, p1/p2 = 250.
One HDTV costs 250 bushels of corn.
oil price = $80 per barrel. p1/p2 = 20 (i.e., one barrel of oil costs 20 bushels of corn.)
|2. Equilibrium in a Closed Economy|
|Gains from Trade||
Equilibrium is established when supply = demand for each good.
The autarky price of a good is the market clearing price in a closed economy.
Autarky price = pA; = (p¹/p²)A; at autarky.
At this price X = M = 0.
(domestic) market clearing price = autarky price
because domestic and foreign markets are not connected.
Domestic market is insulated from foreign shocks.
|export or import|| If p* > pA, then
Export supply: X = X(p1/p2), +
(The export supply curve is positively sloped)
Import Demand: M = M(p1/p2), -
(The import demand curve is negatively sloped)
|Finding||Commodity trade occurs because of differences
in autarky prices between countries.
Goods flow from a low-price country from a high-price country. (add two demand and supply curves)
|3. Equilibrium Price in the World Market|
|Assume: there are two countries: US + Japan|
|4. Tariffs and Domestic Prices|
If a tariff is imposed, domestic price does not fall to the free trade level p*.
Thus, the price gap (p and p*) indicate the degree of protection in the importing country.
Equilibrium price occurs at the intersection of world demand and supply curves.
World demand = horizontal sum of demand curves of all counries.
world supply = horizontal sum of supply curves of all countries
|Higher prices||High domestic prices indicate some sort of trade restriction or undervaluation of one currency.|
|High prices in Japan|
Augustus the Strong
Augustus der Starke (King of Poland, 1670-1733) "sold" 600 horsemen to Friedrich Wilhelm I of Prussia and in return received 151 porcelain vessels.
|4. Doha Round is not for Free Trade (Choi's opinion)|
WTO was established in 1995. Doha Development Round was supposed to have started in Seattle in 1999, and was going to be called the "Seattle Round," but such efforts were stymied by vehement demonstrations in Seattle. Doha conference began in Doha, Qatar in 2001.
In these trade negotions, member countries send their representatives to negotiate the terms with others. They weigh the benefits and costs of their concessions, which are measured by consumer surplus and producer surplus resulting from the proposed concessions or agreements.
low income countries < $1026
lower middle income countries ($1026 < $4036)
World Bank: LDCs = low income + lower middle income countries. China ($6800 in 2013)
Developing countries grew at the rate of 4.2%, while developed economies grew at 3.2% over the 1965-99 period.
Africa's per capita GDP = $2,300 in 2013. The growth rates of one third of African countries is greater than 6% per year. Africa's GDP = $2.4 trillion = France's GDP (growth rate of F is 1%.)
BRICS will soon be larger than the US.
|Failure||At the WTO meeting in Nairobi in 2015, 160 countries ended the negotiations. Developing countries want more concessions in
terms of reduced trade barriers from developed economies, especially
in agriculture, whereas EU is against them.
India and China want to protect their poor farmers (not import foodstuff from the US).
|EU's strategy||Perception: Make EU a self-sufficient economy.
Block imports from the US (e.g., ban genetically modified products such as corn, soybeans.)
Choi's opinion: Give up on WTO.
focus on bilateral trade agreements.
The US withdrew from Trans-Pacific Partnership.
TTIP is uncertain; talks may resume.
Likely to withdrew from NAFTA.
the low yuan policy to reduce unemployment and increase trade surplus. (Large and persistent trade surpluses are harmful to China's economy.)
China jumps on the bandwagon to negotiate bilateral trade agreements. (e.g., China + ASEAN free trade agreement)
Starbucks in Qianmen street
|A tailor's shop in Qianmen street|
Doha round has been time consuming.
Bilateral FTAs are easier.
Developing countries do not want to import ag products from the US or EU.
Reaction to limited access to Asian markets.
US + EU output shares = 45% of Gross World Product
Integration US + Developing country: yields more benefits (due to wage disparity) but more difficult to achieve , because it requires a drastic adjustment in the labor markets.
Integration of US + EU is easier, but benefits are smaller than with developing countries.
US withdrew, but Jean-Claude Juncker (President of European Commission) and President Trump agreed to work toward zero tariffs (+ no new American tariffs and EU to buy more soybeans natural gas).
|TPP||Started in Feb 2013. China is not a participant. US withdrew.|
blue color workers suffered from NAFTA.
US-Mexico Free Trade Agreement (Aug 2018)
(i) 75% of auto parts sold in North America must be produced in the US or Mexico.
(ii) 40-45% of auto parts must be made by workers earning $16 per hour. (i.e., Mexico must raise its wage.)
(iii) The agreement will last for 16 years, and will be reviewed every 6 years.