ECON 1202 Lecture Notes - Lecture 8: Autarky, Comparative Advantage, International Trade

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30 Sep 2016

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Falling shipping and transportation costs- make international trade more profitable and desirable. International trade has grown in the last 50 years due to: Decreasing costs of shipping products around the world. Traditionally, countries imposed high tariffs on imports- believed that such measured made their own firms and consumers better off. 1994 nafta- eliminate tariff between canada, us, mexico. Tpp- eliminates tariffs between 11 countries around the pacific ocean- account for ~40% of the world production of goods and services. Tariff- tax imposed by a government on imports. Imports- goods and services bought domestically but produced in other countries. Exports- goods and services produced domestically but sold in other countries. International trade is of increasing importance to the us. Gdp- value of all final goods and services produced in a country during a year. Autarky- a situation in which a country does not trade with other countries.

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The difference between a free trade area and a customs union is, in brief, that the first is politically straightforward but an administrative headache, while the second is just the opposite.

Consider first the case of a customs union. Once such a union is established, tariff administration is relatively easy: Goods must pay tariffs when they cross the border of the union, but from then on can be shipped freely between countries. A cargo that is unloaded at Marseilles or Rotterdam must pay duties there, but will not face any additional charges if it then goes by truck to Munich.

To make this simple system work, however, the countries must agree on tariff rates: The duty must be the same whether the cargo is unloaded at Marseilles, Rotterdam, or for that matter Hamburg because otherwise, importers would choose the point of entry that minimized their fees. So a customs union requires that Germany, France, the Netherlands, and all the other countries agree to charge the same tariffs. This is not easily done: Countries are, in effect, ceding part of their sovereignty to a supranational entity, the European Union.

This has been possible in Europe for a variety of reasons, including the belief that economic unity would help cement the post-war political alliance between European democracies.

But elsewhere these conditions are lacking. The three nations that formed NAFTA would find it very difficult to cede control over tariffs to any supranational body; if nothing else, it would be hard to devise an arrangement that would give due weight to U.S. interests without effectively allowing the United States to dictate trade policy to Canada and Mexico. NAFTA, therefore, while it permits Mexican goods to enter the United States without tariffs and vice versa, does not require that Mexico and the United States adopt a common external tariff on goods they import from other countries.

This, however, raises a different problem. Under NAFTA, a shirt made by Mexican workers can be brought into the United States freely. But suppose that the United States wants to maintain high tariffs on shirts imported from other countries, while Mexico does not impose similar tariffs. What is to prevent someone from shipping a shirt from, say, Bangladesh to Mexico, then putting it on a truck bound for Chicago?

The answer is that even though the United States and Mexico may have free trade, goods shipped from Mexico to the United States must still pass through a customs inspection. And they can enter the United States without duty only if they have documents providing that they are in fact Mexican goods, not trans-shipped imports from third countries.

But what is a Mexican shirt? If a shirt comes from Bangladesh, but Mexicans sew on the buttons, does that make it Mexican? Probably not. But if everything except the button were made in Mexico, it probably should be considered Mexican. The point is that administering a free trade area that is not a customs union requires not only that the countries continue to check goods at the border, but that they specify an elaborate set of ârules of originâ that determine whether a good is eligible to cross the border without paying a tariff.

As a result, free trade agreements like NAFTA impose a large burden of paperwork, which may be a significant obstacle to trade even when such trade is in principle free.

Question:

1. From this case, what is the main difference between a free-trade area and a customs union?

2. Why are rules of origin needed for a free-trade area? How might they be protectionist?

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Please answer all of the following multiple choice questions... Thank you!

Hours to Produce One Unit
	Worker hours to produce yarn	Worker hours to produce fabric	Additional worker hours to produce fabric instead of yarn
Country A	8	12	?
Country B	4	13	?

Based on the data in the chart, which of the following scenarios presents the most efficient use of resources? (5 points)

	Country A produces yarn and fabric, and Country B imports both
	Country A produces yarn, and Country B produces fabric
	Country B produces yarn, and Country A produces fabric
	Country B produces yarn and fabric, and Country A imports both

	Worker hours to produce one unit of oil	Worker hours to produce one unit of natural gas
Brazil	8	4
Argentina	10	2
Mexico	7	3
United States	6	1

According to the chart, which country has an absolute advantage over the other countries in oil production? (5 points)

	Brazil
	Mexico
	Argentina
	United States

10.

U.S. companies have made fewer manufacturing contracts with China in the last few years, preferring other countries in the region. Which of the following is a potential reason? (5 points)

	China has most-favored-nation trade status with the United States.
	China has large reserves of cheap labor and can produce inexpensive goods.
	China's standard of living has increased, and workers are requesting more pay.
	Shipping costs from China over the Pacific Ocean have decreased.

11.

The U.S. government wants to restrict Nation A's access to weapons-making materials. Which of the following actions will it most likely take? (5 points)

	Establish a free-trade zone with Nation A
	Impose tariffs on certain goods imported from Nation A
	Institute an embargo on trade in certain items with Nation A
	Place a quota on certain types of goods Nation A can export

12.

Because the United States has an embargo on Cuba, (5 points)

	the United States regularly increases the taxes on Cuban imports
	Cuba exports the majority of Cuban products to American companies
	virtually no Cuban products are legally available in the United States
	Cuba must sell products directly to state governments in the United States

13.

Globalization increases the interdependency of the world's countries. Inflation in one country would most likely (5 points)

	not impact inflation in other countries
	cause deflation in other countries
	result in stagflation in other countries
	relate to inflation in other countries

Question 6: Which of the following economic goals focuses on equal opportunities for education? (5 points)

-Equity

-Freedom

-Growth

-Security

Question 7: Marcel takes out student loans and works part-time to put himself through college. In time, he earns an advanced medical degree and goes to work in an understaffed city -hospital. Marcel's economic decisions benefit the goal of efficiency by (5 points)

-making his own job

-related decisions

-paying back loans to reduce the debt

-contributing to the nation's productivity

-taking advantage of equal opportunities

Question 8: Two countries produce milk and dairy products efficiently. Neither has an absolute advantage. However, Country A exports milk to Country B, and Country A imports cotton from Country B. Which of the following is inferred? (5 points)

-The opportunity cost of producing milk is lower for Country A.

-The opportunity cost of producing cotton is higher for Country B.

-Country A has a natural resource advantage in cotton.

-Country B has a natural resource advantage in milk.

Question 9: Worker hours to produce one unit of natural gas; Worker hours to produce one unit of oil; Brazil 4 9; Argentina 2 10; Mexico 3 7; United States 1 6. According to the chart, which country has the comparative advantage in oil production? (5 points)

-Brazil

-Mexico

-Argentina

-United States

Question 10: The United States can manufacture books at a much more rapid pace than manufacturers in Indonesia. Which of the following is a reason? (5 points)

-Indonesia, as a developed country, has a highly paid and experienced workforce

-Indonesia, as a developing country, has a less advanced manufacturing infrastructure

-The United States, as a developing country, has a high comparative advantage in manufacturing.

-The United States, as a developed country, has a lower cost of living than Indonesia

Question 11: A group of nations establishes a free-trade zone. What is the most likely effect? (5 points)

-Cost of trade increases

-Exports decrease

-Imports decrease

-Trade increases

Question 12: The United States may have a tariff on cotton products from China in order to (5 points)

-prevent Chinese manufacturers from losing profit because of low prices

-protect the business of the American cotton growers and manufacturers

-stop trade due to political disagreement on economic policy

-promote sales in the United States of cotton products from China

Question 13: A Chinese international salesperson hoping to increase exports to the U.S. may worry about the inflation of the U.S. dollar because the inflation may (5 points)

-increase the United States' supply of Chinese products

-decrease tariffs on Chinese products sold to the United States

-increase taxes on the United States' products sold to China

-reduce the United States' demand for Chinese products

Question 14: How would a strong U.S. dollar impact the trade of grain produced in the United States? (5 points)

-U.S. grain exports decrease

-U.S. grain exports increase

-U.S. grain imports decrease

-U.S. grain imports stagnate

Question 15: Which of these can be a result of inflation? (5 points)

-Businesses grow cautious about spending

-The government has to cut spending

-The price of household items increases

-Workers benefit from a lower cost of living

Question 16: If the inflation rate increases faster than their income, people will most likely (5 points)

-use a higher proportion of their incomes on basic needs

-spend a lower proportion of their incomes on basic needs

-get more goods and services for less money

-obtain fewer goods and services for less money

Question 17: To increase your standard of living, your wages must (5 points)

-rise faster than the inflation rate

-rise more slowly than the inflation rate

-keep pace with the inflation rate

-have a negative inflation rate

Question 18: Look at the map showing the European Union (EU) and its free-trade agreement (FTA) countries. Which is true about most current EU free-trade agreements? (5 points)

-The European Union's free-trade agreements are with all of the most developed nations in the world.

-The European Union's free-trade agreements include agreements with both developed and developing nations.

-The European Union's free-trade agreements focus on nations with access to overland trade routes

-The European Union's free-trade agreements focus on the Southern Hemisphere, as distant countries have access to goods not grown in Europe.

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ECON 1202 Lecture Notes - Lecture 8: Autarky, Comparative Advantage, International Trade

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