Chapter-3
Chapter 3: The Political Economy of International Trade Cooperation
- The Economic case for trade
- Abundant factor (丰富的)
- Scarce factor (缺乏的)
- Industries
- Labor-intensive industries (garment 服装industries)
- Capital-intensive industries (electronics industries)
- Countries and their specialized industries
- Developing Countries > abundant labor & scarce capital > garment industries
- Developed Countries > scarce labor & abundant capital > electronics industries
Utility Curves US
Shirt
Opportunity cost: 200/ 200 = 1
US have comparative advantage in produce computer than shirt
200M
PPF= equilibrium
130M
Computor
70M 200M
China
Shirt
400M Opportunity cost: 400/ 100 = 4
China has the comparative advantage
in producing shirt than computer
because they have more labors
PPF= equilibrium
Computor
100M
In these case, US have comparative advantage in produce computer than shirt over China because US have more technology and produce 1 computer could be exchange 4 shirts from China. In contrast, China has the comparative advantage in producing shirt than computer because they have more labor and exchange shirt with US would also increase the number of computer in China as well. In this chapter, we are focusing on how can trade makes them better off.
Trade Bargaining
- Patience
- out-side options
US: PL > LL > LP > LP L = Liberal (open trade)
P = Protectionism
Therefore, the role of WTO are very important to maintain the trade agreement and the relations of countries when they doing trade.
Key Terms
- Bargaining: governments exchange markets access commitments.
- Contrast Curve: the set of mutually beneficial agreements that exhaust available joint gains
- Dispute Settlement Mechanism: follows a standard procedure that was agreed to by all members of the WTO. If a government bring an alleged violation of the WTO rules, the Dispute Settlement Body encourages the government to solve the conflict through direct consultations.
- Enforcement Problem: refers to the fact that governments cannot be certain that other governments will comply with the trade agreement that they conclude.
- Hecksher-Ohlin Model: argues that comparative advantage arises from differences in factor endowments.
- Factor Endowments: factors are the basic tools of production. When firms produce goods, they employ labor and capital in order to transform raw materials into finished goods, including the building that house factories and the machines on the assembly lines inside these factories.
- Nash Equilibrium: is an outcome at which neither player has an incentive to change strategies unilaterally.
- Outside Option: is a government’s next best alternative to agreement. They are trying to seek a better choice for a greater gain.
- Pareto Suboptimal: refers to outcomes in which it is possible for at least one actor to improve its position without any other actor being made worse off.
- Patience: refer to the fact that both parties to the negotiation would prefer to settle today rather than tomorrow. Because each side gains from agreement, delaying agreement sacrifices utility for both. But if one government is more patient than another, it can use its willingness to wait to insist on an outcome closer to its ideal point, and thereby capture more of the joint gains for itself.
- Reciprocity: the practice of exchanging things with others for mutual benefit, especially privileges granted by one country or organization to another.
- Tit-For-Tat: each government plays the strategy that its partner played in the previous round of the game. (if one government play protect in one round, the other government must play protect in the next round of play)
1. What is abundance factor for developing country and developed country?
Abundance Factor: the factor of production that is plentiful in a country
- Developing country: labor
- Developed country: capital
2. What is scarce factor for developing country and developed country?
Scarce Factor: the factor of production which is scarce in the country.
- Developing country: capital
- Developed country: labor
3. How can a country benefit from trade?
Comparative advantage: Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners.
5. Where production and consumption occur?
Production and consumption will occur where the PPF and the indifference curve are tangent.
6. What is Production possibility frontier?
Production Possibility Frontier A production possibility frontier (PPF) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed
Two type of Line
- 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.
7. What is 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 ()
- 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.
8. What are the three Characteristics of Consumption Indifference curves?
-
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
9. When is Equilibrium happen?
Equilibrium happens when
10. 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
11. 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
12. What are two strategy in 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.
13. Why do we need international institution?
- 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
14. What is Pareto optimal?
Pareto optimal outcome is when no single actor can be made better off without at the same time making another actor worse off.
15. What is Pareto suboptimal?
Pareto suboptimal refers to outcomes in which it is possible for at least one actor to improve its position without any other actor being made worse off.
16. What is Nash equilibrium?
A Nash equilibrium is an outcome at which neither player has an incentive to change strategies unilaterally.
17. What is tit-for-tat?
Tit-for-tat is when an actor plays the strategy that its partner played in the previous round if the games