1. Theory Review Global Trade and Finance

2. Our Market International Trade ROW Market Imports Exports ROW Sx US Dm ROW D ROW S US S US D

3. Classical trade theory. Smith-Ricardo, Heckscher - Ohlin, Stolper Samuelson Classical trade theory. Smith-Ricardo, Heckscher - Ohlin, Stolper Samuelson How to trade beyond the Production-Possibilities Curve How to trade beyond the Production-Possibilities Curve

4. Trading along TT’, the UK and SA can consume outside their PPC. EnglandSouth Africa.... T T’ T.C.C. Social choice (the CIC) will determine whether the UK and SA will consume at C or D. CIC

5. Review Characteristics of Markets Pure Comp? Pure Comp? Ease of entry, no L-R pure NR, many sellers, no differentiation Ease of entry, no L-R pure NR, many sellers, no differentiation

6. Review Characteristics of Markets Monopoly? Monopoly? Single seller, first-mover econs of scale or barriers (e.g., a franchise), regulation usual. Single seller, first-mover econs of scale or barriers (e.g., a franchise), regulation usual.

7. Review Characteristics of Markets Oligopoly? Oligopoly? Few sellers, interdependence, policy uncertainty, struggle for market share, differentiation, non-price competition. Few sellers, interdependence, policy uncertainty, struggle for market share, differentiation, non-price competition.

8. Review Characteristics of Markets Monopolistic competition? Monopolistic competition? Ease of entry so no L-R pure NR, unless entry limited through licensing, differentiation to tilt D curve down, appeal to preferences Ease of entry so no L-R pure NR, unless entry limited through licensing, differentiation to tilt D curve down, appeal to preferences

9. Review Characteristics of Markets Ease of Entry? Ease of Entry? PC,MC Product Differentiation? Product Differentiation? MC,Olig MC,Olig Interdependence and uncertainty? Interdependence and uncertainty?Oligopoly No interdependence? No interdependence? (No bus policy interaction) in MC Profitability “slack”, even in long term? Profitability “slack”, even in long term? Monop, Olig, Licensed MC Monop, Olig, Licensed MC

10. Modern Trade Theory Modern Trade Theory Compare modern and classical theories Compare modern and classical theories

11. What role did international trade theory play in the classical perception of the domestic economy? What role did international trade theory play in the classical perception of the domestic economy? Was this realistic? Was this realistic? In Britain? In Britain? In the U.S.? In the U.S.?

12. Classical Trade Theory Classical Trade Theory Pure Competition Trade Sector on periphery Pursuit of comparative advantage with inter-industry trade Domestic Markets

13. Why did the modern theory develop? Why did the modern theory develop? What are it’s two pillars? What are it’s two pillars? Global markets Global markets A role for government A role for government

14. Classical Theory Classical Theory Pure CompetitionEconomies of (trade assumption)Scale Natural (domestic) monopolies Regulation Trade Sector on PeripheryGlobalMarkets Domestic Markets

15. What did Krugman see as the possibilities for government intervention? What did Krugman see as the possibilities for government intervention?

16. Modern Theory Modern Theory Economies of Scale “Productive” (?) possibilities for government intervention 1. Optimal Tariffs 2. Supporting Investments/ Promoting exports Global Markets Monopolistic Competition Monopolistic CompetitionOligopolyMonopoly

17. One more time, what is intra-industry trade? One more time, what is intra-industry trade? How do you calculate it? How do you calculate it? Two-way trade = IIT Total trade = IIT + Inter-industry trade IIT = 1 - sum of |X-M| sum of X + M X $100 mil perfume, M $50 mil. IIT = 1 – (50/150) = 1 – 0.33 =.66

18. One more time, what is intra-industry trade? One more time, what is intra-industry trade? How do you calculate it? How do you calculate it? Two-way trade = IIT Total trade = IIT + Inter-industry trade IIT = 1 - sum of |X-M| sum of X + M M $60 b cars, X $40 b IIT = 1 – (20/100) = 1 – 0.2 =.80 Why has it grown? Why has it grown?

19. Global Markets Growth of intra-industry trade A response to preferences expressed in international trade demands. Monopolistic Competition Monopolistic CompetitionOligopolyMonopoly

20. Trade Policy: Tariffs (normal and optimal), Quotas, and VERs. Trade Policy: Tariffs (normal and optimal), Quotas, and VERs.

21. A quota is much like a tariff. C represents internal redistribution from the consumer to whomever gets the import licenses. P Q SdSd S d plus quota P D w/ quota P ROW DdDd a b d S1S1 D1D1 S0S0 D0D0 a = Change from CS to PS b = “Production effect” c = Quota rents d = “Consumption effect” c

22. Show the idea of VERs.