More on the Tax-Transfer Exam Question

The discussion about the tax-transfer question today was pretty fun (to me, at least). There were some challenging issues raised. The political economy question of whether a "benevolent dictator" is at all feasible was a fun aside, but let's refocus on the straight incentives at work to see if ramrodding free trade (with no compensation for losers) down the public's throat is even desirable.

Tyler Gannon's point is that we should adopt policies that will encourage people to invest in the "right" form of human capital as quickly as possible, since specializing in the sector in which we enjoy a comparative advantage will lead to the greatest amount of gains from trade. To focus the analysis, let's consider a couple of possible scenarios about human capital "investment": 

Scenario 1: human capital investment is not costly (but also not immediate).
Here, compensating the losers makes no difference on the incentive to switch sectors. Even the most modest wage differential between the two sectors will leave an incentive for workers to gravitate towards higher-wage professions. 

Scenario 2: human capital investment is costly (and also not immediate).
Here, not only does it take time to learn about higher-paying jobs in other sectors and find them, but it also costs a certain amount of your income to learn the new trade. Thus, the incentive to switch sectors will be motivated by: (1) the wage differential (net of taxes and wage subsidies), (W_c - t) - (W_w + s); and (2) the cost of re-investing in the new skills needed to become proficient in that sector (C), where:
W_c = Wage in the cloth (export) sector;
W_w = Wage in the wine (import) sector;
t = Tax on each cloth worker (= 0 for a shift to free trade with no transfer);
s = Subsidy to each wine worker (ditto).
Assume that t < W_c - W_w, which would be the case if we raised wine workers' incomes just to the level needed to attain autarky utility. This would leave all of the net gains to be enjoyed by the cloth workers. (Also note that in a static model we also require a government budget-balance condition which implies that t*L_c = s*L_w.)
In this case, wine makers stuck in a cruel transition mechanism (say, because Tyler is their "benevolent dictator") will invest in retraining as long as the benefit is at least as much as the investment cost, i.e. if W_c - W_w ≥ C; wine makers living it up in a redistributionist nannystate will only retrain if (W_c - t) - (W_w + s) ≥ C. Note that the second condition requires the cost of reinvesting to be lower than would be the case in the transfer-less transition to free trade, which means current workers are less likely to reinvest, and the transition to full specialization will be slower. Future generations, however will begin their "careers" by investing in the "right" types of human capital (and surely will also hope and pray that the economy never ever changes again!). As the old fogies who foolishly misinvested in wine-making at the start of their lives die off, we reach the free trade equilibrium with full gains from trade.
But, of course there are problems with even this analysis. What if people can't afford the cost of retraining? Even if the benefits justify the cost, workers might not be able to reinvest because the lower wage now received in the wine sector is barely enough to cover a subsistence level of consumption (call this minimum subsistence expenditure "E"), and will not leave sufficient additional funds to cover the cost. One might argue that credit markets could solve this by allowing you to take out a loan against your future earnings, but credit markets often fail when information is imperfect and lenders may not be willing to give loans. In this case, without the ability to take out a loan, investment can only occur in the cruel transferless world if W_c - W_w ≥ C (incentive must be sufficient), and Ww - E ≥ C (the cost must be feasible). One can imagine a set of parameters where (W_c - t) - (W_w + s) ≥ C and Ww + s - E ≥ C, but Ww - E < C. In other words, there will be sufficient incentive to reinvestment under BOTH policy regimes (transfer and no transfer), but the cost of re-investment is only affordable with the transfer. Thus it is possible that the transfer might actually speed up the rate of convergence to the desired free-trade level of specialization and the hands-off approach will not only slow down this convergence, but will even worsen and perpetuate inequality. Whether this is indeed the case is an empirical question, so make sure you enroll in my econometrics course in the spring!
Also, what if the cost of acquiring cloth-making skills increases (which we might expect since it will be the cloth makers - who earn higher wages using their time to produce cloth - who will be needed to train all of these new cloth makers)?  If this is the case then one might imagine how, over time, this might lead to a widening of the gap between "winners" and "losers" as the children of wine workers (who themselves could not afford to invest in wine retraining) now also cannot afford the (rising) cost of training their children to achieve the goal of attaining a better career in the cloth sector. 

Russia seeks to derail Ukraine’s trade deal with E.U., deploying taunts and insults

As the Ukraine looks to derail a pending trade agreement with European Union, Putin, Russia's president wants the Ukraine to join the customs union of Russia. Russia, a major importer of chocolate from Ukraine's premier confectionery refuses buy product from them due to a claim of Sanitary Shortcoming in the candy boxes.
Therefore, Ukraine is faced with the options to either choose a path that would open them up to European values of transparency and the rule of law far to the east, or it can join Russia, as stated in the article, in a financial and cultural zone that is increasingly defining itself as separate from the West and not answerable to Western norms.
Ukraine imports most of its natural gas from Russia and would endure major losses if sided with the European Union. It is evident that Russia does not want that to happen. 

Russia, a way bigger world power that Ukraine, has more that it can effect when it comes trade and to set world prices. 

In you were a Ukrainian leader, what would you do or suggest in such situation? Would you side with the E.U or join the customs union of Russia? Keep in mind that the European Union, aside from its financial status right now, just accepted Croatia in its midst, and is taking on Croatia's bad debts. 

Gordon Brown: Will China's commitment to growth drive global economy ?

 “Will China's degree of success decide global growth in the 21st century? ”

  Sept. 13, Brown, who attended the annual Summer Davos Forum that opened on Wednesday in Dalian, said Chinese officials would reveal how long China will need to make the transition from an investment-led, middle-income country to an innovative, consumer-driven, high-income one, and thus when it will become the world's largest economy.

  Recalling the history of China's development in recent years, under the first wave of modernization, China's progress to middle-income status has been astounding and dramatic. Nowadays with the officials focusing on China's next challenge — the shift to a high-productivity, high value-added, consumer-based economy — the aim is to double average incomes by 2020, to achieve 70 percent-plus urbanization by 2025.

  But Brown also noted that most important barriers to long-term success are the disparities in wealth and low levels of innovation, skills and capital operation. As far as I know, I incline to believe the rules in a free market and consider it is a difficult path for China to reach a developed level. Initially, the economic policy must focused on structural change in the long-run and reinforce what Chinese President Xi calls “socialism with Chinese characteristics”, such as restrictions on labor mobility and private credit. It usually takes a long period to address some structural issues. Secondly, as an essential share of national income, services have just overtaken manufacturing, and China has a long tradition that consumer spending is always bigger than investment. It is usually a dangerous method to pursue economic development only by export-led growth. Thirdly, China should try its best to make the RMB become one of the world currency and pay more attention to reforming efficiency in the process of opening up the financial or electricity sectors to non-public capital, etc. In my opinion, I do not believe that nowadays the Chinese government could take these efficient actions very quickly.

 As we discussed in classes, the export-led industrial structure has different impacts on different countries. For a small country, it has so weak effects on foreign trade that it should enlarge its foreign trade exports and pursue the greater scale merit. But for China, an influential trading body with 1.3 population and huge purchasing power, it is very hard to display its comparative advantages only by focusing on the export orientation strategy. Moreover, the trading conditions are getting worse for domestic enterprises, especially in the south of China, due to the vicious competition such as the reduction of unit cost, the technical barriers of trade and inefficient resource allocation.

Source:

http://news.xinhuanet.com/english/world/2013-09/14/c_125386851.htm

  

Sudan and South Sudan Open Trade. How does this affect their welfare? Other Examples?

http://www.sudantribune.com/spip.php?article48169

Sudan and South Sudan have agreed to open trade. By utilizing the Standard Trade Model we can see, in theory, why this decision was made and why it is in fact a good one. First off, each country’s welfare will be expected to increase. Each country can offer competitive advantages in certain services and goods. Opening up to trade allows them to take advantage of such competitive advantages.For example, the diagram below is taken from the homework set we had. It shows how the different countries benefit from opening up to trade. The dotted line is based on their original domestic pricing whereas the solid black line shows what happens when they open up to trade.

http://articles.washingtonpost.com/2013-07-02/opinions/40316090_1_embargo-limited-private-enterprise-odebrecht

Moving on, this situation got me thinking; what about the United States and Cuba? As many know, the United States still has a trade embargo in place with Cuba. This was a political decision of the past. As the article from the Washington Post points out the embargo is out of date and the United States needs to stop being hard-headed. Opening up to trade with Cuba would help provide positive net gains for the welfare of both the United States and Cuba as can be seen with the Standard Trade Model.

Increased Trade between Japan and U.S.

Japan has the third largest economy in the world behind the U.S. and China; China is Japan's biggest trade partner followed by the U.S, being that Japan is a relatively small island its economy relies on exports.
As of August, Japan increased it's trade surplus with the United States to $5 billion; August represented the 8th straight month in which Japan's trade surplus with the U.S grew. Also in this same 8 month period Japan's exports to the U.S. rose, these exports were lead by cars, car parts, and organic compounds. Japanese imports of U.S goods also rose in August for the 5th month in a row, these higher levels of imports came primarily from U.S exports of aircraft, liquid petroleum gas, and motors.
While running a trade surplus with the U.S, Japan experienced it's 14th straight month having a trade deficit with the rest of the world, this deficit equaled about $9.7 billion. Japan's overall exports have risen for the past 6 months while its imports rose for the 10th month in a row, Japans primary exports consisted of cars, organic compounds and mineral fuels; in this same time Japan's main imports were oil, electronic parts, and clothing.
I pose the question why does Japan run a trade surplus with U.S, while running a deficit with the rest of the world? Could the U.S increase it's T.O.T with Japan by approaching more of a trade equilibrium between the two?

World Trade Up despite June fall

On Wednesday the Netherlands Bureau for Economic Policy Analysis or the CPB for short released their July findings for world trade. It seems that trade increased by 2.2 percent worldwide. This comes at a very crucial point where June drops in world traded were under heavy debate by the G-20 members at their summit this month. July findings suggest that the worst to be feared will not in fact become reality. Developing economies in Asia were the backbone behind this growth by increasing imports up by 5.4 percent and exports by 5.7 percent.

                  World GDP grew by .9 percent again being pushed by the developing economies in Asia. Though the Middle East and Latin America surprised the world by increasing their trade flow worldwide as well. With this increased trade and GDP development the CPB has also published that world factory output is up by .5%. These indicators all seem to concur with the JP Morgan Global Purchasing index, which has hit its highest level in August since February 2011.

                  What’s more is that the World Trade Organization has released its projections that the world could see trade increases up to 3.8 percent for the rest of the year. It is also projecting growth of 4.5 percent for the year 2014. Though it is .5 percent lower than its April prediction of 5 percent. Current growth as well as future predictions are considerably more substantive than the 2012 total of 2 percent.

I response to this news please hit on the following-

What is driving this increased trade growth? Is their reason to worry about trade growth in the future? What in particular are Asian economies doing to increase their trade growth at the rate they are?

SYRIAN CIVIL CONFLICTS,SANCTIONS/RESTRICTIONS AND EFFECTS ON INTERNATIONAL TRADE.

    Speaking of regional trade across Europe particularly EU, Syrian cannot be ignored to be the heart of trading partner in the region. In fact, Syrian w has being a member of WOT where he applied for a membership since October 2001. 

                      Also, Syria is one of the partners of the Euro-Mediterranean Partnership that promotes economic integration and democratic reform across 16 neighbors to the EU's south in North Africa and in the Middle East. One important part of this work is to achieve mutually satisfactory trading terms for the region partners. Syria and the EU have negotiated an Association Agreement.

               Therefore, as the world understands long internal conflicts in Syrian, we can say that this might have been a cause of slow strong integration of  Syrian into the WOT. As we learn in class that, political policies and conflicts can affect international trade functions.

          Following the violent internal repression in Syria, in May 2011( which continue to present)the EU adopted a number of restrictive measures towards Syria, including an import ban on crude oil and petroleum products as well as export restrictions including on dual-use goods, key equipment and technology for the oil and gas industry, as well as certain telecom equipment and luxury goods. In trading terms, with all the present conflicts and unsettled both political and civil strives, Syrian remains as isolated partner in the business cycle and its trade terms if applied to other nations they are less harmful on their trade. However, on my view as we saw in class that, being a nations having various trade opportunities to the outside world, its no trade state affects not only Syria itself, but also other former trade partners. All who had trade relationship now they suffer either import or export problems of goods and services.

                        As some data indicate from the European commission below, we can conclude that, restrictions and trade sanctions on Syria will affect the former partner in regional trade integration for both Africa, and Europe. "Syria traded with EU in 2011 with trade of approximately pounds 6.1 with about 90% of export of both energy goods and agriculture. And with restrictions, trade decreased to about 4.1 pounds in the year 2012, which is about 61%..."In fact, the restrictions have lowered trade performance in the region.  http://ec.europa.eu/trade/policy/countries-and-regions/countries/syria/                                                                                           
                        Therefore, from what we learn in class especially on the question of effects of trade sanctions, we can see the effects of conflicts in Syria. The sanctions put by EU and the WTO will have wide effects on the general international trade. Above, we seen Syrian having oil deposits, have also connection to Africa. Here, the outside will never have restrictions from Syria, but its out of trade however, will be of impact negatively on other nations.

            Therefore, trade sanctions or trade restrictions on countries with political conflicts will affect the trade on the international level and hence fall in the economic growth of all the trade partners on the international level because this restricts free trade, and adopts the no trade atmosphere within the region, though it may be true that the restrictions and arrogance of Syria, may not affect the other countries, but its No trade state with other countries will affect trade partners in the region.

Deogratias

The European Crisis and the accession of Croatia

First Greece -- then Ireland, Italy, Spain and Portugal: The European common currency has come under pressure from large national debts and the effects of the global financial crisis.

The 2013 enlargement of the European Union saw Croatia join the European Union as their 28th member state on 1 July 2013.  Croatia's accession to the EU comes at a difficult time for the union. 

From an economic point of view, the EU is now shouldering a new burden by taking Croatia into the fold. The country's economy has been in recession for years and unemployment is at about 20 percent.

EU entry will not make Croatia prosperous overnight. But according to Croatian´s Prime Minister Zoran Milanovic small nations must be open and the European Union has granted Croatia a great opportunity. The opportunity includes financial support.

What does accession mean for Croatia and the EU? And what are the incentives for the EU by the accession of Croatia?  Why has the EU still the power to bring about change in countries willing to join and why does it remain attractive to outsiders? 

Intensive Argument Over The Sovereignty Of A Group Of Islands Between Japan And China

In the past few years, there has been an intensive argument over the sovereignty of a group of islands between Japan and China. Japan owns the uninhabited islands which are also claimed by China. A senior U.S Diplomat said that Washington hopes Japan and China, the world's second and third largest economics, can stay peaceful and develop together if possible. It is perfect to solve this problem by cooperation between Japan and China, but achieving this goal seems like an impossible mission.

Behind the superficially sovereignty and historical issue is the huge amount of fossil fuels in that sea area and several economic values like The Pacific Black Tide and fishery. Actually, the dispute of the islands can be seen as a conflict of fossil fuels because China and Japan are large oil-importing countries. For example, 55.2% of the total oil consumption of China was imported from other countries in 2011. If China can control the fossil fuels of the islands, it can reduce the importation of the oil or reserve the fossil fuels for the future.

As we discussed in class, in Pareto optimality, "it is impossible to make any individual better off without making at least one individual worse off." Decreasing large amount of importation of oil means China is able to save a lot of foreign currency which can be used to consume other internal scarce goods such as iron ore and high-tech products. The internal supply of these goods may increase while the internal price of them may decrease. thus, we have more space to achieve Pareto optimality because people can buy more products with the same money. People who buy these products become better off and no one else becomes worse off due to these deals. It is meaningful for the development of the country's economy

source : http://news.yahoo.com/us-official-urges-dialogues-over-china-sea-dispute-112633924.html

Could The United States and The European Union be reaching a trade agreement?

     http://www.nytimes.com/2013/09/13/world/europe/corporate-spin-already-on-us-europe-trade-talks.html?pagewanted=2&_r=0    

     America and The European Union are in talks about open trade with each other. Companies have already begun to lobby both sides to be able to get the best possible outcomes form this deal. Give the geopolitics of this no one is really thinking that this is going to go smoothly. Ferrari wants America to drop some trade duties on the importation of cars and car parts. These demands are here because both sides of the Atlantic are trying to get the best deals so that they can seek to most out of this trade agreement. Each side is very excited about the talks because there is a potential for each side to recognize billions of dollars from this agreement. Both sides feel that this deal will be better for Europe than America because of the struggles that the E.U. have been having. American companies are also concerned because there are not as many laws protecting companies in Europe as there is in America. Such as there is no EU law that prevents other companies from infringing on the market. There has been idea such as the investor-state resolution that would allow for companies to file with the trade commission if they think that their products are being infringed upon. There are some out there that feel like if these two countries are to reach an agreement, that there is a possibility that they would set international trade law for the rest of the countries they trade with. This is because the EU and America have been racing for so long to seek better legislation for their own markets that if they are to combine than every other country will have to adopt their laws and regulations.

I think that this agreement could make each country better off in the long run. If we are to look at this just from the view of the country, then I think that this deal will Paretoally optimal because they talked about how the experts in trade feel that each country will be able to recognize billions of dollars from this trade. This shows that each country will be better off because of this deal. If you are to look at this from the view of individuals in the country then I do not think that it is Paretoally optimal because one might be worse off because the other country can allocate making that product more efficiently that the other.  Since that country has better opportunity cost to create the one product and import another. This comparative advantage for the one country would lead to that item not being needed to be produced in the other country. This in turn would lead to that country having to shut down those facilities that produced those goods. Making the other country's people that does not have the better opportunity cost to create those goods worse off because they might be losing their jobs.

         

Crashing Fertilizer Cartels Help U.S. and India

The Belarusian Potash Company (B.P.C.) is losing a country supplying potash in their cartel.  B.P.C. is a cartel for the fertilizer, potash.  Potash’s supply has been limited to the world since this cartel came to be.  The B.P.C. had two main supplier countries, Russia and Belarus, to inhibit the potash supply from international trade.  The second top supplier for potash is Canada with their company Canpotex.  For years, B.P.C. and Canpotex have set the same international prices.  These prices were about $400 for a ton of potash. 

The Russian company has decided to pull out of the B.P.C. to supply more to the international supply.  International supply will large increase potash and will create a price drop for potash.  This hurts the B.P.C. because their shares and profits are falling without the price-fixing.  The—now—competitive international prices will likely force the B.P.C.’s and Russia’s prices to decrease and profits will also decrease.  Belarus and Russia are both going to suffer in regards to their gains from trade.  Terms of trade for both countries are likely to decrease.  The price of their potash exports will be decreasing and therefore the terms of trade will be negatively affected. 

However, the United States and India are gaining great benefits from the increase in supply of potash.  They are able to buy the product at a lower price, which helps the agriculture business in both countries increase their supplies and profits too.  Countries wishing to buy more of potash are expanding their production possibilities.  With the lower international prices, farmers will be able to buy more of the supply even if they do not increase their expenditures or budget lines.  Their budget lines are likely to remain the same in the short run; but, after their crops’ supplies are increased due to more potash, their budget line may allow for expansion.  For now, the United States and India are reaping the benefits from the decreasing competitive prices by expanding production possibilities and improving terms of trade.

http://www.nytimes.com/2013/09/17/business/global/potash-dispute-heightens-tension-between-russia-and-belarus.html?ref=world&_r=0

Consumers in India are facing a rapidly weakening rupee and the country's slowest economic growth in a decade.

On top of already dwindling conditions in India's economy, the dramatic increase in onion prices is being felt by many consumers.  This increase in prices has been up to 500% in one month, whereas the inflation rate is around 6%.  This causes consumers to reduce their consumption and alter their spending patterns since the onion is such a large part of Indian cuisine.  Part of this is due to a drought in India which has reduced the supply of onions with the not so ideal conditions for producing the crop.  Further issues with the country's economy have also played their part.  For example, about 40% of onion crops rot during transportation due to poor conditions of transportation routes.  This goes deeper into the infrastructure of India.

India’s situation is a basic example of supply and demand.  The reduction in supply causes prices to rise which will put some consumers out of the market or cause them to buy less of the product.  The article explains how this relates to India and its own citizens.  We can also look into how this would affect trade with other countries.  With their scarce supply of onions to put on the market, India will have fewer onions to sell nationally as well as fewer to trade.  If India were a large country whose input affected world supply of onions, a significant reduction in the supply of the crop could alter the equilibrium price for onions at a world level.  If the country were to be considered a small country as it relates to its contribution of the crop, India’s output could end up having more of an effect on the country itself but not such an effect on world prices.  The overall effect of this on a global scale depends on the percent of world output which comes from India.

 

Israel Foreign Aid, Good or Harmful?

          Is giving Israel foreign aid harmful of beneficial to the US economy? Lets start by looking at the facts. Israel has received the most foreign aid of any country since World War 2. The overall total of this money has accumulated to $118 billion. As of recent years George Bush has also guaranteed a ten-year, $30 billion aid package. The point of the United States giving all this aid to Israel is for Israel to use it to expand their military.

            As we discussed in class, foreign aid can be good or bad. Looking at all possibilities here, it would be bad if we give all of that money to Israel and they took that money and bought arms from France. As we saw with immiserizing growth, if that money is spent in France, it causes that cost of our goods to drop since the supply has increased. Although that is one possibility, in actuality Israel is required to spend about 75% of the aid it receives in the United States. So just by looking at Israel and the United States, this aid seems to be a good thing for Americans. But lets not forget this is not a two-country world and other countries terms of trade must suffer from these actions.

            This also has me thinking about the institution implications foreign aid creates. The overwhelming majority of this aid goes to the military industrial complex. This clearly has special interest written all over it. Although it does create some jobs for American citizens, it makes the owners even wealthier. This also doesn’t mean that this money is spent because we know that the marginal propensity to consume decreases as one acquires more wealth. That is just another possible implication of foreign aid to consider.

Sources: 

             

http://www.fas.org/sgp/crs/mideast/RL33222.pdf

http://www.nytimes.com/2007/08/17/world/middleeast/17israel.html?_r=0

The Syrian conflict's effect on oil markets

The article Syrian conflict: What it means for the oil markets discusses the possibilities the conflict in Syria will have on the oil markets. The location of Syria, being in the Middle East, plays a key part in what this conflict could do to oil prices. Even the current situation of possible conflict has made the price of oil go up. Syria itself is an oil country, but produces a small amount and doesn't play any real role in the international crude oil trading market. The big problem with the conflict is the fact that Syria is close to a major oil pipeline that could affect global oil trading. The KeyKuk-Ceyhan oil pipeline lies directly north of Syria. This pipeline is one of the main ways Iraq transports their crude oil. This pipeline has the ability to transport up to 1.15 million barrels of oil a day. If any conflict erupts in Syria there is potential that sabotage will occur to the pipeline as retaliation from Syria. Syria also is in close proximity to the Strait of Hormuz. The strait is bordered to the north by Iran. Iran has strong political ties to the Syrian regime. If conflict in Syria reaches a point of action Iran could attempt to block access to the strait. This is important because around 20% of all the oil traded in the world passes through the strait at some point. Conflict in the strait could cause large upward fluctuations of oil in the global market.

With turmoil in the Middle East improvements to domestic oil production could actually occur. United States oil producers would be able to reap the rewards of the inflated oil market. They would be able to sell at the higher price, but would not have to deal with the potential conflicts in the Middle East. Domestic exploration and production companies could use the conflict as a way to expand.

In class we looked at potential outcomes if sanctions would be imposed. We talked about how trade sanctions can reduce welfare. We discussed how some may even gain from sanctions, especially because they rarely reach the level of regimes. If the US takes action against Syria it could be detrimental to the citizens of Syria, the people we would be "trying to help". With the potential of domestic oil companies gaining from conflict in Syria it poses a difficult situation. If the US decides to act on Syria would we only be hurting Syria more and improving our domestic oil companies in the long run. There are many implications on this matter, and many outcomes could come to pass.

President Xi urges G20 to fight against trade protectionism and promote world economic growth

The G20 summit was held from Sep 5, 2013 to Sep 6, 2013. The leaders who took part in this summit discussed the world economy, the system of international finance, employment, trade and other issues. Xi Jinping, the president in China, said that it was very important to reject trade protectionism together so that the G20 members could promote free trade and improve the growth of the world economy. And he came up with three ideas to achieve these goals. First of all, the G20 members should oppose trade protectionism, and develop the openness of the world economy. They need to create a free and open global trading environment to boost facilitation and liberalization of international trade. Second, they “should strengthen the global multilateral trade system”, whose core is inclusive and non-discriminatory. Last but not least, they should promote the global value chain and set up an integrated world market. During this process, they ought to know the division of each country and help developing countries strengthen trade capacity. Xi thinks that the development of the economy depends on the mutual cooperation of each country.  Additionally, Xi also talked with other counties’ presidents to build up good relationships with them.

In my opinion, I agree with Xi’s view. Nowadays, every country cannot be content with their own resources, technology, capital and so on. So if they can trade freely, it will help them promote a lot. Furthermore, we learned that free trade was beneficial to “Pareto Improving” at the country level, which means that we can make more people better off without making others worse off. Additionally, international trade has an effect on the terms of trade. If a country can increase the TOT, it will make the country better off, because the country can earn more money from exporting and save more money from importing. Also, consumers and producers can attain the gains from trade. For example, consumers can import more goods that are scarce in their countries and producers can obtain cheaper material to lower costs. There are a lot of benefits for trading, so it is important for countries to boost trade without making many restraints, such as tariffs, trade barrier, etc.

Sources Researched:

                        

http://english.cntv.cn/program/newsupdate/20130907/100956.shtml

http://news.xinhuanet.com/english/china/2013-09/07/c_132700299.htm

New Zealand Terms Of Trade Rise 4.9%

In this article it states that New Zealand has 4.9% increase in term of trade. As we learned in class we learned that Term of trade is simply the Price or monetary amount of exports divided by the monetary amount of imports.In this article it is stated that "Terms of trade is a measure of the purchasing power of New Zealand's exports abroad. An increase means that New Zealand can buy more imports for the same amount of exports". Now this here is a confusing statement because if that is true wouldn't term of trade go down if New Zealand used it in its next quarter to buy more imports. The other problem I see with the statement above are the words purchasing power. When it says purchasing power of New Zealand's exports abroad it seems in a way misleading to what it actually is which is just the price at what others have paid for their exports. The way one might actually interpret the statement might be as if New Zealand has more disposable income because their exports and that might not exactly be the case.

The was another statement that made wonder if terms of trade is a necessary number and that was "The terms of trade increase of 4.9 percent reflected higher dairy prices,". This statement indicates that there are other factors than the quantity of an export that effect terms of trade. The one factor that I thought of was exchange rate of one country to another. This factor could in deed increase term of trade for a country for exports since it would involve multiple countries and all their exchange. In fact this could be used in reverse and New Zealand could try to buy all of its imports where their currency is stronger, just like a consumer tending to buy where it is more convenient.

To summarize Terms of trade increased in New Zealand and the way the article use the term seemed to be misleading to what it actually means and an increase in the terms of trade was because of an increase in the price of dairy but that may not only be factor that effects the price of exports. If you have an opinion or feel I have mistated something please feel free to post a comment. 

Some Blogging Basics

NOTE TO STUDENTS: COMMENTS AND/OR QUESTIONS POSTED TO THIS ENTRY DO NOT COUNT FOR GRADED CREDIT
Once you are logged in to Blogger using your SAU Google login, starting to write your blog post is pretty easy. Another way to sign in is to visit the blog website, and if you are not already logged in, you can click "sign in" at the top right of the screen, and log in using your "sau.edu" email address and email password.
If you have accepted the invitation to join the blog as an author, you will now see "International Trade Class Blog" in your blogroll and you can simply click the orange button with the pencil icon inside of it to create a new post. If you do not see this, and you have not accepted the invitation, then go to find the email and accept the invitation, or EMAIL ME requesting me to re-send the invitation.
Once you have begun a new post, there are a few things that I recommend. First, when you refer to an outside source (and you should always be incorporating some outside source to show a connection between the class theories and the real world), as I have done in today's post about industrial policy when referencing this article by Robert Atkinson and Michael Lind, you should embed the link into the text that you have selected by: (1) highlighting the text where you want the link to appear; (2) clicking the "Link" button at the top of the formatting bar in the "Compose" view of the post editor; and (3) pasting the URL of the web source you have mentioned in the box.
If you so choose, you can also upload images into your post by clicking the picture icon button (just to the right of the "Link" button"), then adding a link to a web location for your picture or uploading a picture into Blogger from your own computer. The same goes for videos (the button next over from the "picture" link. If your video appears on a website, but isn't available on YouTube, you can still embed it using by pasting the "embed code" from that website into the html code. I have done this for the "Daily Show" clip (which I know not to be available via YouTube) embedded below. This is slightly more advanced, but definitely doable.

Finally, if you really like doing your text editing in Word and not in your web browser, MS Word 2007 and up allows you to save your Blogger login information so that you can automatically publish to the blog directly from your Word application on your computer (and also save a local copy to your hard drive). In word, simply start as if you are going to create a new document, but instead select "New Blog Post" from the "New" dialog box. Word will prompt you for your blog's host (Blogger), as well as your login name/password. You may have problems linking the accounts if you maintain more than one blog with your "sau.edu" login name.

Made Everywhere (Repost)

Another Repost, but good food for thought as we introduce the basic concepts of trade and trade accounting from Chapter 1.

What does "Made in ______" really mean? On Wednesday, we briefly discussed the idea of gross trade versus value-added trade in the context of the iPhone. The argument was that when the final assembly of the iPhone is imported to the US, its full value (say, about $200) is counted as imports from China to the US in the US trade balance. But really China's value-added is only about $6.50. The rest is made up of components built elsewhere, as well as design, marketing, and financial services that are carried out here, in the US. Scott Lincicome offers a nice graphical example showing how these vertical supply chains work, and where things are typically made from start to finish (I do have a minor quibble with him including the sewing machines in the supply chain, because those aren't really "components", but let's look past that).
The bottom line is that vertical FDI allows firms to specialize production of various stages of production in multiple locations to best exploit the gains from trade and comparative advantage.
We will talk more about the gains from trade and comparative advantage in Chapters 2-4 of the textbook, and more about vertical FDI in Chapters 5 and 7. However, the way that comparative advantage is exploited internally by the firm when it engages in FDI highlights the distributional impacts of trade along the lines of comparative advantage: For the country that is sending capital abroad, the shareholders who own the capital win, as do consumers; the workers who were once employed by that firm domestically lose; yet, the net effect is positive.

How Big Are (or Aren't) the Gains from Trade (RePost)

The following is a re-post from last fall, but the information and data are certainly relevant.

One of the things trade economists have traditionally enjoyed doing to hammer home the gains from trade is to cite seemingly outrageous numbers about the positive impacts of trade. For instance, there is this 2003 report from the US International Trade Commission that estimates the net costs from trade restrictions for 1990 to be about $170,000 per job saved (but yes, jobs were saved by protection!). Or, there are these calculations that take a more nuanced approach sector-by-sector:

Industry	Annual loss to economy from barriers = Cost	Net employment loss if barrier is removed = jobs "saved"	Annual cost PER JOB SAVED
Textile and apparel	$ 10.04 billion	55,000	$ 182,545
Maritime transport	$ 2.79 billion	2,450	$ 1,138,775
Dairy	$ 1.01 billion	2,083	$ 484,878
Motor vehicles	$ 710 million	3,400	$ 208,824
Sugar	$ 661 million	1,694	$ 390,200
Meat	$ 185 million	100	$ 1,850,000
Steel mills	$ 162 million	1,265	$ 128,063
Nonrubber footwear	$ 147 million	1,316	$ 111,702

From McConnell and Brue, 2002

Source: compiled from United States International Trade Commission data released December 1995. Data are for 1993.

New research has called these claims into question, at least somewhat. Jonathan Dingel summarizes some of the new research on trade (which includes contributions by Arkolakis et al., Ossa, and the opinions of Prescott) using more advanced trade models here. Arkolakis, et al. find that the gains from trade in these "new models" is "not much" - maybe 4-7 percent of GDP. But, these gains depend on the estimation of elasticity coefficients, which may vary by industry. When these coefficients are estimated separately for different industries, the gains from trade increase by about 6 fold, to somewhere between 24 and 42% of GDP.
Thus, the gains from trade may well be large after all.