TRADE:INSTITUTIONS AND IMPACT- Why and how do countries trade?

Fulbright Economics Teaching Program Trade: Institutions and impact Lecture 1 2006-2007 TRADE: INSTITUTIONS AND IMPACT Why and how do countries trade? Outline and schedule Ari Kokko Why do countries trade? • Get goods and services that cannot be produced at home • To accumulate gold • Get cheaper goods and services • Efficiency and growth • Different theories and policies for different motives Ari Kokko Ari Kokko 1 Fulbright Economics Teaching Program Trade: Institutions and impact Lecture 1 2006-2007 Gains from trade: the simple view • Clear gains if countries are strong in different areas: absolute advantages • Less obvious - but undisputed - gains even if one country is “better” in all areas: comparative advantages Ari Kokko Absolute advantages Motorbikes Rice Vietnam 20 10 Laos 10 20 Labor requirements for one unit of output Ari Kokko Ari Kokko 2 Fulbright Economics Teaching Program Trade: Institutions and impact Lecture 1 2006-2007 Comparative advantages Motorbikes Rice Vietnam 20 10 Laos 100 20 Labor requirements for one unit of output Ari Kokko Comparative advantages ⓿Trade is profitable as soon as relative prices differ between countries ⓿Why are there differences in relative prices? ⓿Classical and neoclassical theory: – technology differences (Adam Smith 1776 / David Ricardo 1815) – differences in factor endowments (Heckscher-Ohlin 1930) Ari Kokko Ari Kokko 3 Fulbright Economics Teaching Program Trade: Institutions and impact Lecture 1 2006-2007 Policy conclusions: neoclassical theory ③Free trade and specialization is optimal ③pattern of comparative advantages is given by nature ③all industries are equally “desirable” ③International framework should support development of free trade ③unilateral liberalization more difficult because of protectionist interest groups and lack of coordination Ari Kokko Institutions: Bretton-Woods solutions ⓿Four cornerstones of international economy after WWII to support growth of free trade – International Bank for Reconstruction and Development – International Monetary Fund – International Trade Organization – Price stabilization fund Ari Kokko Ari Kokko 4 Fulbright Economics Teaching Program Trade: Institutions and impact Lecture 1 2006-2007 But why is world trade not free? • Protectionism leads to higher prices, lower consumption, and lower welfare both at home and abroad... • …so why is there still a lot of protectionism? Ari Kokko Unequal gains from trade at the micro level • Interest groups matter: trade benefits some groups but hurts others • trade raises the rewards of a country’s abundant factor of production and reduces the rewards of the scarce factor (Stolper-Samuelson theorem) • the groups that lose may oppose free trade • the transition to free trade may have troublesome social consequences Ari Kokko Ari Kokko 5 ... - tailieumienphi.vn