Midterm summary GPE

GPE lecture 1
Supply/Demand basics
- Price increases = firms supply more
- Changes in supply = shifts in supply curve
o Changes in input or factor prices
o Technology changes
- Price declines = people demand more
- Changes in demand = shifts in demand curve
o Preferences
o Changes in income

International trade – trade of goods and services across borders.
- More than one sovereign government, often also more than one
monetary regime and set of laws.
o Complications: trade regulation affects markets
o Still very lucrative  can help both countries, but might hinder
some people.
- Globalization started in the 1870s-1914  international capital
o Economics was still seen as a zero sum game: the more
resources and markets we control, then we win (mercantilism).
 Value adding in the metropole (taking raw materials from
colonies).
 Most wealth = most military power – most economic power
= etc.
- 1930s-1940s Anglo-American economists introduced the idea of a new
international order based on Ricardo’s comparative advantage.
o International trade would create more wealth than autarky would
(no need for colonies)
o Creating incentives to work together and create development.
 This actually did bring the middle-class
o Bretton woods System: to foster world trade and democracy,
and increasing cooperation.

Anti-globalist economic concerns
1. Immigrants – depresses wages
2. Threat of moving companies overseas
a. Worsen working conditions
b. Help union bustin
c. Reduce workers’ bargaining power
3. Foreign investment
a. Increase housing prices in cities
b. Increased debt levels
 Reduce standards of living
 Increase instability/quality of life.

,International economists: there are some losers, but it enriches
everyone.
- Lower price of goods! Quality of life! Less poverty!
- This is most economists
Reality: complex, it does create more wealth than autarky, but they do
depend upon a social safety net.

Absolute advantage - country can
produce a product more cheaply than
another. (1 product)
- Country will export to another country.
- Poor countries can use export to get
foreign capital  gains from trade.
o International trade creates a World
Price, which creates export and
import.

Comparative advantage – a model with 2
products.
- Ricardian model of trade
- Comparative advantage is needed to create a balance between export
and import in a country, through international trade.
o Now both countries can gain from trade, even if one country is
worse at making both things.
- PPF: Production Possibility Frontiers: the trade-off that countries
must make in order to produce one unit, in terms of another.
o For 1 motorcycle, you have to sacrifice 3 units of rice.
 You have limited labour, therefore you have to balance
your labour.
 Opportunity cost
o Slope of your PPF shows how many of 1 good you have to give
up, to get another.
o Always a negative slope.
- Curved PPFs are more realistic, because they show that near the
edges of production, it’s very difficult to turn every last resource into
output.

Demand diagonals (DD) – shows demand for 2 products at once, it
blends the demand for both.
- It shows a preference for 1 unit over the other.
- The DD will meet with the PPF in autarky at point A (Demand x Supply).
o The supply of the 2 products is determined by the slope of the
trade-off  opportunity cost.

, World supply curve – average of the price differentials in the 2
countries in a comparative advantage model.
- With the new world price, both countries could consume more, if they
produce at B (Max labour on 1 product).
o The new price is the average between the 2
- The excess not consumed is exported.

Heckscher-Ohlin model – explicitly says that the differences
comparative advantage between two countries might be due to the
abundance of factor resources
- Some may be good at labour-intensive production, others in high-wage
specialized labour
o Natural capital, human capital, physical capital, etc.
- Specialization, comparative advantage, and trade, creates more
wealth, which enables more consumption.
o As we are privileged we cannot condemn (over)consumption
without looking at the gains a slightly lower price has on the poor
part of society.
 It may be the difference between gaining an education, or
not.

GPE lecture 2
How do countries regulate cross-border trade?
Limiting trade – why?
Cultural opposition
Sector or factor opposition (strong industry  government intervention)
When there is an absolute advantage in international trade and the two
countries decide to take part in trade, the producers in the expensive
country will naturally want to limit the impacts of imports, because this
will drive many of them out of business.
Endangered suppliers will lobby the government

National policies on international trade – Trade policy
Tariff
Tariffs can be illegal and can start trade wars  very obvious
Tariff: tax on imports
Specific tariff: fixed tax per physical unit of import
Ad valorem: tax on value
Dumping: when a country/company sets prices lower internationally than
domestically – to drive out international producers.
Non-tariff measures.
Taking a loss in short term to drive out international producers, thereby
creating a monopoly
Every measure (tariff/non-tariff, will have differing effects on various
sectors of the domestic and international market