GLOBAL ECONOMICS (International Trade) Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” Day 10 Global Economics, Day 10 卜安吉
The Basic Graph Global Economics, Day 10 2
Add in Consumption Possibilities Global Economics, Day 10 3
How does an increase in the Price of Cloth affect Supply? Global Economics, Day 10 4
Then we added Indifference Curves Global Economics, Day 10 5
Again, the Price of Cloth increases Global Economics, Day 10 6
Again, the Price of Cloth increases n Explain the income effect of the price rise n Explain the substitution effect of the price rise n What does the “Terms of Trade” mean? Global Economics, Day 10 7
Now to Relative Supply & Demand Global Economics, Day 10 8
Biased Growth Global Economics, Day 10 9
Cloth Biased Growth (RS right) Global Economics, Day 10 10
Food Biased Growth (RS left) Global Economics, Day 10 11
The Effects of Economic Growth n Export-biased growth is growth that expands a country’s production possibilities disproportionally that country’s export sector. § Biased growth in the food industry in the foreign country is export-biased growth for the foreign country. n Import-biased growth is growth that expands a country’s production possibilities disproportionally in that country’s import sector. § Biased growth in cloth production in the foreign country is import-biased growth for the foreign country. Global Economics, Day 10 12
Therefore n Export-biased growth reduces a country’s terms of trade, generally reducing its welfare and increasing the welfare of foreign countries. n Import-biased growth increases a country’s terms of trade, generally increasing its welfare and decreasing the welfare of foreign countries. Global Economics, Day 10 13
Effects of a Tariff on the Terms of Trade OK, now we have to be EXTREMELY careful!! • A tariff is placed on the imported good – internal price increases • We BUY less food, more clothing (RD shifts right) • Producers switch from clothing to food (RS shifts left) Ø The relative terms of trade increase (Pc/Pf increases) Global Economics, Day 10 14
Effects of a Tariff on the Terms of Trade Global Economics, Day 10 15
Effects of a Subsidy on the Terms of Trade Global Economics, Day 10 16
Distribution of Income Across Countries v When the domestic country imposes an import tariff, the terms of trade increases and the welfare of the country may increase. v When the domestic country imposes an export subsidy, the terms of trade decreases and the welfare of the country decreases to the benefit of the foreign country. Global Economics, Day 10 17
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