Alternative Theories of Trade Objectives of the Chapter This chapter updates and puts into perspective the various theories examined in the previous chapters. The discussion highlights the rise of intra industry trade between nations that have similar factor endowments. Product differentiation, monopolistic competition, and global oligopoly all play a role in explaining how a country can both import and export the same basic product, such as automobiles, computers, apparel, or alcohol.
An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade.
Underdeveloped nations today, Chang believes, are weak players in a much more competitive system. If the chief justification for a tariff is to stimulate infant industries, it must be high enough to allow domestic manufactured goods to compete with imported goods in order to be successful.
This theory, known as import substitution industrializationis largely considered ineffective for currently developing nations. The chart at the right analyzes the effect of the imposition of an import tariff on some imaginary good.
Prior to the tariff, the price of the good in the world market and hence in the domestic market is Pworld. The tariff increases the domestic price to Ptariff. Consumers are made worse off because the consumer surplus green region becomes smaller. Producers are better off because the producer surplus yellow region is made larger.
The government also has additional tax revenue blue region.
However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles.
The graduate textbook “Advanced International Trade: Theory and Evidence,” by Robert Feenstra, can be ordered from Princeton University Press. The empirical exercises for chapters 2 – 9 (First Edition) and chapters 2 – 12 (Second Edition) are available below. Praise for the previous editon: "No other book in advanced international trade matches this one in providing a clear, complete, up-to-date, balanced, and systematic summary of international trade theory and evidence. Chapter 3 The Standard Theory of International Trade “If a foreign country can supply us with a commodity cheaper than we ourselves can Trade Based on Differences in Tastes a Illustration of Trade Based on Differences in Tastes II. Chapter Summary and Review.
Removing the tariff and having free trade would be a net gain for society. Under similar analysis, export tariffs, import quotas, and export quotas all yield nearly identical results.
Free trade creates winners and losers, but theory and empirical evidence show that the size of the winnings from free trade are larger than the losses. It is economically efficient for a good to be produced by the country which is the lowest cost producer, but this does not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff.
Applying free trade to the high cost producer and not the low cost producer as well can lead to trade diversion and a net economic loss.
This is why many economists place such high importance on negotiations for global tariff reductions, such as the Doha Round. Though it creates winners and losers, the broad consensus among economists is that free trade is a large and unambiguous net gain for society.
Gregory Mankiw"Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.The Theory of Comparative Advantage - Overview. Historical Overview. The theory of comparative advantage is perhaps the most important concept in international trade theory.
Applications of International Trade Theory: The Caribbean Perspective Chapter 1, 2, and 3 The World Economy: Trade and Finance 6 th Edition Yarbrough and. International Trade is a course that will allow you to get a better understanding of issues of integration, globalization and how they relate to economic development .
Chapter 6 Overview The Benefits and Problems of International Trade in Context of Global Crisis Objective: Analyze the different benefits and problems of international trade and how this industry is affected by the global crisis Class versus Industry Cleavages: Inter-Industry Factor Mobility and the Politics of Trade.
International Economics: Theory and Policy provides engaging, balanced coverage of the key concepts and practical applications of the two main topic areas of the discipline.
For both international trade and international finance, an intuitive introduction to theory is followed by detailed coverage of policy applications. Chapter 6: International Trade: Multiple choice questions: Multiple choice questions.
Try the multiple choice questions below to test your knowledge of this chapter. Once you have completed the test, click on 'Submit Answers for Grading' to get your results. Which trade theory holds that nations can increase their economic well-being by.