April 2014Econ 455 International Trade and Finance PPTs series 3.

April 2014 Econ 455

International Trade and Finance

PPTs series 3

April 2014 Econ 455

IntroductionPart I Trade1. Theories of Trade

a) Motives for Tradeb) Absolute Ádvantagec) Comparative Advantaged) Extensions

2. Barriers to Tradea) Non.tariffary Barriersb)Tariffsc) Quotasd) Subsidies

Part II Finance1. The Balance of Payments

a) Concept and Structure of BoPb) BoP and GDPc) BoP goals

2. Foreign exchangea) Exchange rates and Marketsb) Exchange rate Mechanicsc) Exchange Rate Policies

3: Exchange Regimesa) Gold Standardb) The Bretton Woods Systemc) Extansionsd) Controversies

4. Agents and their Activities5. Selected Exchange Rate Theories

List of Contents

April 2014 Econ 455

Part I Trade 2. Barriers to Trade

April 2014 Econ 455

a) Reasons for Barriers

- AutonomousThe barrier exists without anyone‘s responsability

- Political extortion or retalliationImposed regardless of economic consequences

- RevenueThe budget needs financial means

- ProtectionismThe national economy as a whole or industries within are to maintain their competiveness

Part I Trade 2. Barriers to Trade

April 2014 Econ 455

b) Non-Tariffary Barriers

Lack of information: knowledge about foreign goods, which would normally attract buyers is not available

Availability of chickens feet in Kentucky not known about in China

Goods which could may have a market in one country but not in another because of taste differences

Intestines not appreciated in the US

Religious rules forbid the consumption of certain goods

Gummi bears – pork or beef gelatine- in India or Muslim countries?

April 2014 Econ 455

Discrimination

Bureaucracy,

Slowdown in processing imports

Political slogansBuy American,

buy British,

freedom fries

April 2014 Econ 455

Boykott and Embargo

Boykott: Imports from a certain country will be prohibited, either in total or limited to certain products

Embargo: exports to a certain country will be prohibited, either in total or limeted to certain products

Motive: Foreign Politics or

moral, environmental issues

April 2014 Econ 455

c) Custom Duties (Tariffs)

Tax levied on imports:- Specific tariff

constant amount of money per item

- Ad valorem tariff

percentage of import price (CIF)

Original purpose: Revenue for the Government

Derivative purpose: influencing imports

April 2014 Econ 455

Four effects of tariffs to be analized:- Influence on international trade- Influence on domestic production and consumption, - Influence on consumer and producer surplus and - Influence on Government revenue

April 2014 Econ 455

Two cases to by distinguished:

“Small” country: It is assumed, that the influence between economic variables of the small country and the rest of the world is asymmetric:Economic activities have no influence on the international economy, but the international economy has an influence

“Two” country-case (also “Big” country-case): Influence of economic variables is symmetrical

4. Custom Duties (Tariffs)

April 2014 Econ 455

P

q

S

D

A „small“ country

pa

qa= qad=qa

s

4. Custom Duties (Tariffs)

Production and Consumption before trade

April 2014 Econ 455

Consumer and Producer surplus before trade

P

q

S

D


pa

qa= qad=qa

s

Consumersurplus

Producersurplus

April 2014 Econ 455

M1

P

q

SD


pa

qa

pw S+Sw

qs1

qd1

m1

m: quantity of import

M: Value of import

April 2014 Econ 455

P

q

S

D

pa

qa

pw S+Sw

qs1

qd1

m1

Consumersurplus

Producersurplus


April 2014 Econ 455

P

q

SD

pa

qa

pw S+Sw

qs1 qs

2

qd1qd

2

m1

t

m2

pw+t


M2

Tariff reduces quantitiy and value of imports,

April 2014 Econ 455

P

q

SD

pa

qa

pw S+Sw

qs1 qs

2

qd1qd

2

m1

t

m2

pw+t


Consumersurplus

Producersurplus

April 2014 Econ 455

RevenueA historical puzzle: Because of rising US

imports federal revenue from tariff duties – a very significant source of revenue for the country - rose. The federal budget showed an unconstitutional surplus. Congress passed legislation to reduce tariffs, the consequence being an even higher budget surplus.

What happened?


April 2014 Econ 455

pw

Revenue

P

q

SD

m0

t = 0 Revenuet*m=0


April 2014 Econ 455

pw

Revenue

P

q

SD

t1

Revenue

m1


April 2014 Econ 455

pw

Revenue

P

q

SD

t1

Revenue

m1

t2

m2

Revenue


April 2014 Econ 455

pw

Revenue

P

q

SD

t2

m2

Revenue

t3

m3

Revenue


April 2014 Econ 455


Revenue

Solution of the puzzle: Whether a change in the tariff leads to rising or declining revenue from tariffs depends on the combined price elasticities of demand for imports.

April 2014 Econ 455


Construction of a new diagram to demonstrate solution

Gap of D-S= Imports

SD

D-S

National market

q

Market for Imports

m

pW

Gap of D-S= Imports

April 2014 Econ 455


Import, tariff, and revenue

Dm

PW

m

Tariff

Revenue

m = 1

m < 1

m > 1

April 2014 Econ 455



PW

m

Tariff

Dm

m = 1

m < 1

m > 1

April 2014 Econ 455



PW

m

Tariffm = 1

m < 1

m > 1

Dm

April 2014 Econ 455



PW

m

Tariff

Dm

m = 1

m < 1

m > 1

April 2014 Econ 455


Plotting tariff Against Revenue

PW

m, Rt

Dm

t

April 2014 Econ 455

P

q

SD


pa

qa

pw S+Sw

qs1

qd1

Imports 1

p2

S+Quota

qs2 qd

2

Imports 2

Quota

d) Import Quotas

April 2014 Econ 455

Modification: „Big“ country

qqa

S+Sw

qs1 qs

2qd

1qd2

Imports 1t

P SD

pa

pw

pw+t

Imports 2

April 2014 Econ 455

e) Export Subsidies (Small Country)

P

q

SD

pa

qa

pw

D

qs1

qd1

x: quantity of export

X: Value of export

D+x

x1

Absence of subsidies

April 2014 Econ 455

P

q

SD

pa

qa

pw

D

qs1

qd1

x: quantity of export

X: Value of export

D+x

x2

Introduction of subsidies (specific)

Subs

April 2014Econ 455 International Trade and Finance PPTs series 3.

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Transcript of April 2014Econ 455 International Trade and Finance PPTs series 3.