Global economics international business: Absolute Advantage-make more. Opportunity cost. Inside PPF-under civilization. Opportunity cost is constant if it is a straight line. The slope of trade line=price they chose to trade at Gains from trade=outside PPF. Comparative Advantage-opportunity cost, who can do it cheaper. Producing on PPF, consuming outside. Not a zero-sum. Person max. Their material well-being when they use their resources where they. Trade doesn’t imply their living standards or income are equal. Income increases for people with increased absolute advantage without trade.
GATT: General Agreement on Tariffs and Trade. The agreement, not an institution. Signed in 1947 by 23 nations. Very successful in lowering trade barriers. Initially mention all ignored agriculture, textiles, approached services. Replaced by WTO in 1986The Uruguay Round 1986-1993Most ambitious round that reformed tariffs and subsidies on agricultural textiles, sensitive areas. Birth to WTO. Extended trading system into intellectual property rights and services
DOHA
World Trade Organization: The purpose of this organization was to help trade flow freely. Deals with rules of trade between nations at a global near-global level. A negotiating forum. A set of rules. A place to settle disputes. Trade without discrimination. Most favored nation-give you have to equal treatment to everyone. National Treatment-once something is in the country, you may have to treat it just like your own stuff. Freer trade gradually through negotiation. Predictability through binding and transparently. Lowers risks. Confident that barriers aren’t going to change. Promoting fair competition. Encourage development and economic reform. Extending transition time to developing. Current Members of WTO
International Monetary Fund (IMF): Monitors the world’s economies, lends to members in economic difficulty and provides technical assistance. It is made up of 186 member countries. The money comes from membership fee (quota) the larger a country’s output and trade, the larger its quota. US largest quota. 257 has to be a major currency, 757 can be a small currency. Power depends on your country’s economy and the big guys have a lot of power. Only helps countries by invitation. Charges interest. Conditionality-we’ll give you $, but you have to make changes. New since 1980’s World Bank: Consists of 187 country membership. There is a membership quota with a source of financial and technical assistance to developing countries around the world. Not a bank in common sense, but a Helper with low-interest loans, international free credits, and grants to developing countries.
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5 Types of Regional Trade Agreements:
- Partial Trade Agreement: 2 or more countries liberalize trade in a selected group of product categories such as steel or autos.
- Free Trade Area (FTA)-Trade with the specific region (NAFTA).
- Customs Union (CU): An FTA plus a common external tariff (CET). The European Union in the 1970s and 1980’s. MERCOSUR (South America).
- Common Market: A CU plus free mobility of factors of production. EU in 1990s. ESA (Eastern and Southern Africa).
- Economic Union: A common market with coordination of macroeconomic policies including a common currency, harmonization of standards and regulations. Includes US, Canada, and EU.
RTA v. the WTO
An RTA is clearly a violation of most favored nation treatment. So why would WTO allow an RTA? Simple. If it creates more trade than it diverts, the WTO isn’t going to care about it. RTA’s-building blocks vs. stumbling blocks can create easier to reach an agreement, Less domestic disruption, Experiment with new ideas, Credible threats. Yet it undermines multilateral agreements, Polarize countries-piss people off, Sap energy, Discriminate against less-developed countries. These International Institutions help to create order, Reduce uncertainty, Overcome free-rider program, Effectiveness ultimately depends on individual commitment. Its cons are National sovereignty, Transparency, Ideology, and Symmetric implementation and adjustment cases.
Gains from trade: Adam Smith observed that increasing specialization in production was responsible for increased output. David Richards would, in turn, say trade is good for both parties, Theory of free trade and demonstrated the gains, From trade: one of the longest-standing and most agreed upon results in economies. The Basic Assumptions would then be made to set the stage. Only 2 nations, Only 2 goods, Only one input-labor, Technology is constant, No learning effects of production, Labor is perfectly mobile and can move back and forth between the industries, but not between countries. If labor and capitalization become concentrated in that activity alone. Difficult to develop a diversified and highly educated force. National Income can fluctuate quality if commodity. Price abruptly-leads to secure macroeconomic activity. Can be a significant source of potential instability and corruption. To avoid curse Strong institutions to guard against corruption. Can be a significant source of potential instability and corruption. Commitment to education and skills to develop human capital and diversify.
Shortcomings of the Riparian Model:
- It predicts an extreme degree of specialization that we do not observe in the real world
- Assumes away the effects of trade on the distribution of income within countries
- Allows no role for diff. in resources among countries as a cause for trade
- Neglects the possible role of economies of scale as a cause for trade
Empirical evidence. The basic prediction of the Ricardian Model-that countries should tend to export those goods in which their productivity is high-has been strongly confirmed by a number of studies over the year. Higher productivity-export more.
New Theory of Trade
Ricardian Model-Smith and Ricardo believed productivity differences-and hence comparative advantage-war a result of each country’s new technology. Ricardo considered a single homogeneous factor of production (labor) and would not have been able to produce comparative advantage without technology difference in labor. Activity using different technologies
Factor Endowments: Nations are endowed with different levels of factor inputs (land, labor, capital, and entrepreneurship) What is the role of factor endowments motivating trade? Hecksher-chain model of trade. Founder of the modern theory of international trade. Key difference: based on a country’s comparative advantage on its factor endowments, rather than differences in technology
H-O Theorem: Countries will export products that utilize their abundant and cheap factors of production and import products that utilize true countries factors. Countries comparative advantage uses in the production of goods that intensively use relatively abundant factors. For example, the U.S. has a lot of lands, true produce corn, etc. they have a comparative advantage in canola oil because of their endowments (not their labor). Once this is determined, it should be possible to predict which goods they’ll export and import. Relative abundance of a factor implies that in autarky its relative cost is less than in countries where it is relatively scarcer. Relatively scarce resources are more expensive
Price Convergence: In autarky: Canada provides relatively more jeans because it has relatively more labor. The relative price of jeans will be less. The relative price of jeans will higher in the U.S. As trade occurs, the world price of jeans will converge Graph. The HO model provides a more sophisticated way to analyze gains and losses from trade because it drops unrealistic assumptions. Labor can be divided into categories of different skill levels. Other types of inputs can be included. Industries can require different mixes of various inputs. Advantages: Drops unrealistic assumptions. Labor can be divided into different skill levels. More than one input. Varying input requirements for different goals resulting in the different allocation of benefits among producers. Displays systematic relationship between factor endowments in a country and winners/losers of trade.
Income Distribution effects of Trade
Trade produces a convergence of relative prices. Change in relative prices has a strong effect on relative earnings of input factors. In Canada, where $ of jeans rises, people will get their income from labor gain from trade, and those who get….
Stopler-Samuelsom Theorem
Owner’s of a country’s abundant factors gain from trade but owners of a country’s scarce factors lose. Theorem: An increase in the price of good raises the income earned by factors that are used intensively in its production. Not every factor used in production, but the abundant factor. Ultimate effects on income of an opening of trade depend on the flexibility of affected factors
Specific Factors Model. Factors of production that are “stuck” in an industry, at least temporarily, are referred to as specific factors. Ex: -commodities is bread and steal. Factors are land, labor, and capital. Bread requires land and labor. Steel requires capital and labor. Land and capital are specific factors in the short run are immobile. Labor is a variable factor and is mobile between industries. Suppose the introduction of trade leads to a drop in the price of steel (capital and labor). In the long run: landowners gain and capital owners lose. In the short run: Since land is immobile, landowners whose land is used for steel production will be hurt. Since capital is immobile, capital owners whose capital is used for bread will gain
Policy Implications: Most economists don’t regard the effects of trade on income distribution as a good reason to limit trade. In its distribution effects, trade is no different from many other forms of economic change, which are not normally regulated. Economists would rather address the problem of Income Distribution directly; rather than by interfering with trade flows. But is a highly contested issue. Those who lose from trade are usually more informed, cohesive, and organized
Empirical Evidence
Tests on US Data: Leontief found that U.S. exports were less capital-intensive than U.S. imports, even though the U.S. is the most capital-abundant country in the world Leontief Paradox. He suggests that the U.S. comparative advantage is actually high in skilled labor, rather than the traditional idea of capital. Tests on global data: Bowen, Leamer. Implications: While the HO model has been less successful at explaining the actual patterns of trade, it remains vital for understanding the effects of trade, especially its effects on the distribution of income
Why is Comparative Advantage not enough? Trade models built exclusively on the idea of Comparative advantage have a mixed record of success in predicting trade patterns. It’s very difficult to measure a country’s Comparative advantage. Even if the Comparative advantage is known, the country may have several products to choose from which utilize the abundant factor.
Internal Economies of Scale (Ex: Electrical Utility)
Both of the previous models assumed constant returns to scale: When inputs doubled, outputs also doubled. In practice, many industries are characterized by economies of scale: Production is more efficient the larger the scale at which it takes place. Doubling inputs more than doubles output. Decreasing costs over a relatively large range of output. Economies of scale can be a source of comparative advantage.
Marginal Cost (MC)-how much more to produce 1 more
Average Cost (AC)-Total Costs/# of units
International Strategic Management Companies
STEEL-ALU
- Vertical Integration-control
- Scarcity
Novartis
- Diversify
- Pharmaceutical
- Related?
- Regulation
Airlines
- Mergers and acquisitions are hard to pull off: challenging
- Mature industry
- No synergies
Nokia-Siemens
- 50/50
- Sharing risk/technology
- Speed
- Synergies
Intel
- Restructuring
- Downsizing
- Downscoping
Sprint-Nextel
- Stop bleeding
- Cultural issues
- Bad service
- Merger
KKR/Tribune/IAC
- Buyouts
- LBO-Raising capital throughout debt; goal is to
- LBO Again: Portfolio of TVs, cubs (sell-off unrelated part)
- IAC-Divestment; Barry Diller
- Restructuring better through buyouts and divestment
AUTO Alliances
- Synergies-research and development
- Speed
Software
- Mergers
- Integration problems
- Backward integration
Loreal
- Multidomestic
- Uni-Diversification Global?
- VF-China-Joint Venture