Chapter 3: The Political Economy of International Trade Cooperation §

(F) Day of the week: Wednesday Class: IS302 Created Time: November 11, 2020 10:55 AM Database: Class Notes Database Date: November 11, 2020 10:55 AM Days Till Date: Passed Last Edited Time: June 9, 2021 10:42 AM Type: Lecture, Reading Notes

Content

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International trade/cooperation has been shifting from WTO

But WTO is still needed. Why?

• Theory of International Cooperation: even if every state gains from cooperation, some take advantage of others creating distrust.
• States choose to protect national market for fear of exploitation

Role of WTO for States Today §

• Helps enforce trade agreements
• Provide common rules of practice and enforcement
• Collect and disseminate information of conformation
• Help resolve disputes

1. The Economic Case for Trade §

Abundance Factor: the factor of production that is plentiful in a country

• Developing country: labor
• Developed country: capital

Scarce Factor: the factor of production which is scarce in the country.

• Developing country: capital
• Developed country: labor

1.1. Theory: Production Possibility Frontier §

Trade makes states better off. But how?

Opportunity Cost: products that you forgo to produce another product

If state choose to produce one good, it forgo the chance of producing another good.

Production Possibility Frontier is a line that represent all the combinations of choices for splitting production between each goods. (Supply side)

The Marginal Rate of Transformation: the slope of PPF line, how much change in one production affect the other product.

Straight Line §

If state have constant returns to scale of production. Changes production of one product result in constant change in other production at all times. PPF becomes straight line.

Curved Line §

If state have increasing opportunity cost. Change production in one product result in diminishing marginal return of other production.

1.2. Consumption Indifference Curves §

Indifference curve represent consumer utility, the combination of products consumers will buy to satisfy their needs. (Demand side)

• Consumer utility: the level of satisfaction consumer feel when consuming the product ($U_c$)
• Consumers prefer more > less ⇒ consumer utility increase as u move away from origin
• Indifference curve connect every combination that maximizes consumer utility with the same amount of utility.

$$\text{Utility}=\frac{\text{Consumption}}{\text{Demand}}$$

1.2.1. Three Characteristics §

• Marginal Rate of Substitution: Indifference curves typically slope downwards

  It tells how much of one good consumer is willing to give up to get more of the second good

• Indifference curves bend in to the origin: it gives diminishing marginal utility

  The more of the product a person have, the less they’re willing to give up for one more of it.

• Community Difference Curve: calculate utility for all consumer in a society

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1.3. Equilibrium §

Equilibrium happens when

$$\text{marginal rate of transformation}=\text{marginal rate of substitution}$$

Why do production and consumption shift to and stay in equilibrium?

If production and consumption is not at the point of equilibrium where consumer utility is maximized. Supply and demand will shift both consumption and production to favor the demand and shift to the equilibrium

1.3.1. How Trade Affect Equilibrium §

Trade Effects

• Trade will shift Utility curve to the right and up
• PPF after trade will also shift right and up
• The point of equilibrium also shifts
• Individuals social welfare goes up

How Trade Does This?

Countries produce products with high comparative advantage

U.S. produce computer while China produce Shirts

1.4. Practical Application §

States have finite resources or factors of production

Factor Endowment: the abundance of resources (capital, labor) for use in economy of a country

• Abundant factor
• Scarce Factor

Types of Industries

• Labor-intensive industries (garment): poorer countries
• Capital intensive industry (electronics): richer countries

Service Industries: some are labor intensive some are capital intensive

• High value added service industry

2. Trade Bargaining §

Actors in the global economy can have some overlapping acceptable trade deals

Two Strategies

• Patience: don’t give concession so easily, bargain to see how much in your favor the deal could go.
• Outside Option: stating you have other alternatives to bargain in your favor.

Protected Liberalized

Protectionism

3. Enforcing Agreements §

Countries doesn’t trust each other to comply (Prisoner’s Dilemma)

• Countries seek their own interest rather than mutual benefits

We need international institutions to build trust

• Without institutions countries would all be protected
• To build trust for states to make trade agreements