Lecture 1

Lecture 1
What Good is Trade?
Overview of EA
Welcome back to everybody who took EP and welcome to all new students.
In EA (and the second semester of EPA) we will be discussing a variety of

economic applications.
Given we will be discussing several different topics in depth, this course will be
heavily lecture based.
I wont make you buy 5 different books. Think of the lecture notes as the textbook.
They should be reasonably comprehensive
Therefore, lecture attendance is very important!
Required reading associated with each lecture is posted to Learn.

The required reading is meant to compliment the lecture rather than repeat it.
This will be one or two short articles. Questions about reading may appear on
tutorial sheets/online quizzes.
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Overview of EA
For this term, you are going to be assessed on
Tutorial attendance
Online quizzes (one posted to Learn each Wednesday) Only top 5 / 10 count.
Poster project
Degree exam
General issues should be directed to the course administrator at

EPA@ed.ac.uk. For example, if you have a tutorial time conflict you should
email this address.
Academic queries should be directed to me, the course organiser, at

Nick.Myers@ed.ac.uk
My office hour is Thursday 11-12 in room 4.11 of the economics building. I am
very happy to discuss these topics in more depth.
Please check the location of your tutorial in semester 2 on your

timetable, most of you are not in the same tutorial you were last term.
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Overview of EA
Outline
Weeks 1-5: Nicholas Myers
Lecture 1. What Good is Trade?
Lecture 2. Darwin, Gravity, and Trade
Lecture 3. Currency Unions
Lecture 4. Who Migrates and Why?
Lecture 5. The Effects of Migration
These 5 lectures cover 3 broad topics; international trade, currency unions
and the economics of immigration.
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Overview of EA
Outline
Weeks 6-8: Nancy Arnokourou
Frontiers of Microeconomics (coverage will include Game
Theory, Experimental Economics, and so forth)
Week 9 and week 10: Guest Lectures
Michle Belot and Philipp Kischer
(Both are renowned economists based in Edinburgh)
More detail will be provided about teaching block 2 later in the term.
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Outline of Lecture 1
1.
Introduction to Trade
Data and Definitions
2.
Why Do Countries Trade?

Comparative Advantage
Winners and Losers
Intra-Industry Trade
3.
Trade Protection
Overview of Trade Policies
Welfare Implications
Arguments for Protection
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Some basic facts about UK trade (Mostly from the ONS Pink Book):
In 2013, the United Kingdom exported (sold to other countries) on
average 16,000 a second.
In 2013, the United Kingdom imported (bought from other
countries) on average 17,000 a second.
For every 1 produced in the United Kingdom in 2013, 0.31 worth

of goods and services are exported and 0.33 is imported.
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Some basic facts (Mostly from the ONS Pink Book):
In 2013, about 40% of UK exports were of services and 60% of exports
were of goods.
Goods are tangible products (e.g. steel) whereas services are
intangible (e.g. financial services or tourism)
Most world trade is in goods. Only about 18% of world trade in terms
of value is in services.
In 2013, about 23% of UK imports were of services and 77% of imports
were of goods.
In 2013, 44% of the UKs total exports and 52% of total imports in goods
and services were to/from EU28 countries.
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For each of the past 16 or years, the United Kingdom has imported more
than it has exported.
A countrys trade balance is the difference between how much a country
exports to the rest of the world and how much it imports.
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A country runs a trade surplus if they export more than they import.
A country runs a trade deficit if they export less than they import.
What determines a countrys trade balance?
Tastes of consumers for foreign goods

Relative competitiveness
Relative incomes
Government policies
Real exchange rates
And so forth
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UKs top export
destinations
(2012)
Export value Mill (% of Total)
UKs top import

destinations
(2012)
Import value Mill (% of Total)
UNITED STATES
41,089 (13.7)
GERMANY
52,644 (12.9)
GERMANY
31,970 (10.6)
CHINA
31,498 (7.7)
NETHERLANDS
24,527 (8.2)
NETHERLANDS
31,421 (7.7)
FRANCE
20,860 (6.9)
UNITED STATES
29,913 (7.3)
R. IRELAND
17,417 (5.8)
FRANCE
22,585 (5.5)
BELGIUM/LUX
14,627 (4.9)
NORWAY
22,388 (5.5)
CHINA
10,542 (3.5)
BELGIUM/LUX
18,910 (4.6)
SPAIN
8,482 (2.8)
ITALY
14,325 (4.5)
ITALY
8,082 (2.7)
R. IRELAND
12,862 (3.1)
SWITZERLAND
6,778 (2.3)
SPAIN
11,549 (2.8)
Source: ONS Pink Book
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The point I hope we have made so far is that countries trade a lot with
each other.
But why? Why shouldnt the UK produce everything they want (wine,
cars, wheat etc) within their own borders?
The first reason why countries trade, is that they are different.
Countries are relatively better than others at producing particular
products.
Considering climate alone, it would be very silly if avocados were produced in
the UK instead of Mexico.
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It is the maxim of every prudent master of a family,
never to attempt to make at home what will cost him
more to make than to buy. The taylor does not
attempt to make his own shoes, but buys them from
the shoemaker. The shoemaker does not attempt to
make his own clothes, but employs a taylor If a
foreign country can supply us with a commodity
cheaper than we ourselves can make it, better buy it
of them with some part of the produce of our own
industry, employed in a way in which we have some
advantage -Adam Smith The Wealth of Nations.
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Suppose, for simplicity, that there are only two products and only two
countries in the world.
Spain and France can produce either wool or wine.
Each country has 100 acres of land. For one reason or another, land in Spain
and land in France is not equally suitable for production in both products.
Wool (kilo/acre)
Wine (bottles/acre)
France
10
Spain
Each country can choose how much of their land to devote to the production
of either good.
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It is useful to place all of this information in a production possibilities
frontier (PPF) this shows all combinations of wool/wine that a country
can produce.
Countries could feasibly produce inside of the frontier, but not outside of
it.
If France were to devote all of their land to wool production, they could
produce 500 kilos of wool and 0 bottles of wine.
If France were to half of their land to either good, they could produce 250
kilos of wool and 500 bottles of wine.
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France could produce at point A, but they would be wasting land (could
produce more of either good without reducing production of the other).
France could not produce at point B.
If Spain and France cannot trade with each other, people in both countries
can only consume what they produce.
Suppose that Spain uses half of their land to produce each product. Spain
will produce and consume 200 kilos of wool and 100 bottles of wine.
Suppose that France uses 60% of their land to produce wine and 40% of
their land to produce wool. France will produce and consume 600 bottles
of wine and 200 kilos of wool.
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Neither country can consume outside of their PPFs if there is no trade.
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Now lets suppose that, for whatever reason, both countries can start
trading with each other.
Is it possible that they can both be made better off?
Notice that France is better than Spain at producing both wool and wine.
France has an absolute advantage in the production of both goods.
A country has an absolute advantage in some activity if they are flat out
better.
Does this mean that France cannot gain by trading with Spain?
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Recall the definition of opportunity cost. The opportunity cost of
engaging in some activity is the cost of what was foregone.
If France produces a bottle of wine, what does that cost?
To produce wine, France must take some resources away from the
production of wool.
The opportunity cost of producing wine is less wool.

The opportunity cost of producing wool is less wine.
The slope of each countrys PPF shows the opportunity cost of production
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If France were to stop producing
wool on one acre, they would
lose 5 kilos of wool.
If France produced wine on this
now empty acre, they would
produce 10 bottles of wine.
To get one bottle of wine,
France must give up of a kilo
of wool.
To get one kilo of wool, France
must give up 2 bottles of wine.
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Similarly, if Spain produces one kilo of wool, they must give up of a
bottle of wine.
If Spain were produces one bottle of wine, they must give up 2 kilos of
wool.
A country has a comparative advantage in some activity if the
opportunity cost of performing that activity is lower than other countries.
The opportunity cost of producing wine is lowest in France. France has a
comparative advantage in producing wine.
The opportunity cost of producing wool is lowest in Spain. Spain has a

comparative advantage in producing wool.
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Both countries should specialise in producing the good in which they have a
comparative advantage and then trade with each other, they both will be made
better off by doing so.
In this model, lets assume that countries completely specialise (Spain only
produces wool and France only produces wine).
This is unrealistic, of course, but we are illustrating a simple model of the real
world.
Production
Without Trade
With Trade and Specialisation
France Wine
600
1000
France Wool
200
Spain Wine
100
Spain Wool
200
400
Total Wine
700
1000
Total Wool
400
400
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Now Spain can send wool to France in exchange for wine.
Lets suppose the terms of trade happen to be 1 kilo of wool for 1 bottle of wine.
The terms of trade refer to ratio at which a country can trade domestic products for
imported products.
Would France agree to these terms? Yes, to produce 1 kilo of wool on their own,
France would have to give up 2 wine. With trade, they would only have to give up 1
bottle of wine.
Would Spain agree to these terms? Yes, to produce one bottle of wine on their own
Spain would have to give up 2 kilos of wool. With trade they would only have to give
up one kilo of wool.
The terms of trade will end up being such that both countries are made better off (or
they wouldnt agree)
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Both countries enjoy lower prices with trade.
Spain can buy one bottle of wine for one kilo of wool (as opposed to 2
when there is no trade).
France can buy one kilo of wool for one bottle of wine (as opposed to 2
when there is no trade).
Suppose that France sends 200 bottles of wine over to Spain in exchange
for 200 kilos of wool...
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Both countries are now able to consume a basket of goods outside of
their production possibilities frontier.
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Example: Australia and New Zealand each have 1,000 people.
Who has the absolute/comparative advantage in the production of wheat
and cotton?
What is the opportunity cost to each country from producing each good?
What will the terms of trade be?

Bushels
Wheat/Worker
Bales
Cotton/Worker
Australia
1 bushel
3 bales
New Zealand
3 bushels
3 bales
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What are the sources of comparative advantage?
Economists often point to different endowments in factors of production.
Norway
Average years of schooling 11.8
Annual Rainfall (mm)
Proven oil reserves

(millions of barrels)
Population Density (pop
per sq. km)
Myanmar
2.8
Bangladesh
Libya
2,666
56
Libya
Switzerland
48,014
South Korea
Mongolia
505
2
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Winners and Losers

As we have illustrated, trade between countries allows the world
economy to produce more output.
If trade across national borders is completely without barriers, each
country would produce the goods and services that they are relatively
best at.
But now that France specialises in wine and Spain specialises in wool,
what happens to the French wool producers? What happens to the
Spanish wine producers?
Free trade creates winners and losers.
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Winners and Losers
Consider the case of Argentina in the 1900s.
Argentina was relatively better at raising livestock than a lot of other countries in
the world (a lot of good land, not a huge population density)
But Argentina is far from the large markets of North America and Europe. Beef
produced in Argentina would spoil by the time it made it to the large markets.
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Winners and Losers

By 1900, Argentina exported nearly no meat. The United States,
however, exported about 150,000 tonnes of meat annually.
With the advent of refrigeration, this was no longer the case.
Argentina could now export meat to world markets. Because they are
relatively better at producing meat than the U.S., the U.S. meat exporters
could not compete.
By 1913, Argentina exported 400,000 tonnes of meat to the rest of the
world and the United States exported practically none.
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Winners and Losers
Who won and who lost?

Winners
Losers
Argentinian meat producers
American meat producers
Consumers around the world

(meat is now cheaper)
Non-meat producing landowners in

Argentina (land now more expensive)
When trade becomes easier, there will be an expansion in the export oriented
sector (where comparative advantage lies) and a contraction in the sectors
where your economy is disadvantaged.
In principle, it should be possible for the winners to compensate the losers

and still have something leftover.
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Winners and Losers

Example: In 2002, President George W. Bush implemented protectionist
policies which would make it expensive for foreign companies to sell steel
in the United States.
Who do you think won and who lost as a result of this policy?
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The sources of comparative advantage we have discussed do a good job
of describing inter-industry trade.
Inter-industry trade refers to trade in products from different industries
(export wool and import wine).
That is, countries trade because they are different!
But how can we describe this?
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Intra-industry trade refers to trade in products from the same industry
(beer for beer, cars for cars)
Germany exported $146 billion and imported $40 billion of motor
vehicles in 2012 (Source: Comtrade)
Intra-industry trade disproportionately occurs between countries that are
wealthy (and similar)
Intra-industry trade exists (and is welfare improving) for two reasons.
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The first is the notion that there is love for variety.
There will always be some people in France that love BMW, and there
will always be some Germans that love Citroen.
International trade leads to more varieties from which consumers can
choose. More product choices is welfare improving.
Note that love of variety only matters for certain types of
products. For example, all plain white T-shirts are pretty much
the same, but I like having a choice over different types of wine.
The second is the existence of economies of scale.
Economies of scale exist if the average cost of producing some
product decreases when more is produced.
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Suppose it costs 100,000 to heat your

car factory and 1,000 to produce each
car.
If you produce 2 cars, the average cost

is (100,000+2,000)/2 = 51,000.
If you produce 200 cars, the average

cost is (100,000+200,000)/200 =
1,500.
The average cost falls as more is

produced.
Suppose there are two countries (France

and Germany) and two types of cars
(compact and full-size)
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Consider the case where France makes both types of cars and Germany makes
both types of cars, but they cannot trade with each other.
Each car manufacturer faces a small market because they can only sell cars in their
own country.
But now, lets let them trade. What will happen? Both countries will want to
take advantage of economies of scale by focusing production on one type of
car.
France will start specialising in one type of car and Germany will start specialising
in the other.
France will export one type of car to Germany, Germany will export the other
type of car to France. Both countries can take advantage of selling to the
larger combined market and consumers get the variety they love.
Paul Krugman won a Nobel Prize in part for his work on this.
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Now lets turn to a new topic.
We have learned that trade can be welfare improving
Countries can take advantage of their comparative advantages
Consumers can get a greater choice of product varieties
Firms can take advantage of economies of scale.
Despite this, most countries have some trade restrictions in place of one
form or another.
There are specific cases in which trade restrictions are well-advised in the
sense they are welfare improving, but often times they create economic
inefficiency.
With free trade, products tend to be produced where they should be
produced.
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There are many ways in which governments can make trade more difficult.
Perhaps what we hear about the most are tariffs and quotas.
A tariff is a tax placed on a good or service when it crosses a national
border.
Tariffs are the oldest (and perhaps most important) form of trade policy.
They used to be a very important source of government revenue.
In 1795, about 95% of US federal government revenue was from tariffs.
Tariffs have been dramatically reduced since WWII, but they are still
ubiquitous.
Very few countries have no tariffs whatsoever (Singapore, Hong Kong, and
Macau are among the handful).
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Average Tariff in EU by Selected Product
Group (2007)
Countries with Highest Tariffs (2011)
Product
Ave. Tariff (Ad

Valorem)
Country
Ave. Tariff (Ad

Valorem)
Fish and fish

products
10%
Iran
22%
Bahamas
19%
Minerals and Metals
2%
Djibouti
18%
Petroleum
2.3%
Bermuda
17%
Textiles
6.6%
Benin
15%
Clothing
11.5%
Chad
15%
Wood, paper, etc
0.9%
Sudan
8%
Source: WTO
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Rather than a tariff, countries sometimes impose import quotas on certain
products.
An import quota is a limit on the total quantity of imports of a product
allowed into a country during a given period of time.
For example
The United States, in 2013, limited the import of sugar from the rest of the
world to about 3 million tonnes.
China, in 2014, imposed an import quota of 5.3 million tonnes of rice and
894,000 tonnes of cotton.
Russia, in 2012, limited imports of pork to about 350,000 tonnes.
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There are many other ways that governments can restrict international trade.
A few other ways include
Government Procurement Some national governments will sometimes

choose not to purchase goods and services produced in other countries
Content Requirement A minimum percent of value added in every product

produced and sold in a country must be domestic.
For example, perhaps to sell a car in a particular country, you need to use tyres that
were produced domestically.
Sometimes trade barriers are a bit sneakier. Countries will occasionally set
up red-tape barriers.
These arent explicit restrictions, but they are meant to make it a hassle for
foreigners to sell their products.
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In 1982, there was a French decree which

stated that all Japanese VCRs needed to
pass through the customs house in
Poitiers.
The Poitiers customs house had 4

employees (eventually expanded to 8).
All documents had to be in French (rather

than English/German as per the norm)
All documents and VCRs were

meticulously examined (some VCRs were
disassembled for inspection).
Japanese VCR exports fell from 64,000 a

month to 10,000 a month following this.
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Economic Impact of Trade Restrictions

Most economists agree that trade restrictions reduce total welfare.
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To illustrate the inefficiency that can be created, lets analyse the effect of trade
barriers using the tools of supply/demand and consumer/producer surplus.
Consider the market for wheat in the United Kingdom in the early 1790s.
During the Napoleonic Wars, the United Kingdom blockaded European ports. This
protected UK farmers from foreign competition.
The price of wheat in the UK was persistently higher than the price of wheat in the rest
of Europe.
At the end of the Napoleonic wars, UK landowners feared the price of wheat would
plummet in the UK following influx of cheap imports the profits of UK landowners
would fall.
In 1815, the UK corn laws heavily regulated the import of foreign wheat to make sure
the price of wheat in the UK remained sufficiently high.
Lets explore the effects of a tariff on wheat and a quota on wheat.

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We will look at this at the industry level using supply and demand.
We can presume that during this period, the equilibrium price of wheat in the
UK (where supply equals demand) was greater than the world price.
Before proceeding, lets make two technical assumptions to make this easier.
If we relaxed this assumptions we might get some different conclusions (but
we wont go into them here).
First, assume that the wheat market is highly competitive and the wheat
produced in one country is a good substitute for wheat produced in another.
People will buy wheat from where it is cheapest no love of variety
Second, assume that the UKs corn laws did not affect the world price of
wheat.
This is called the small country assumption. We assume that a change in the
UK market will not shift supply/demand in the world market.
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The equilibrium price of wheat in the UK is 90 shillings. The equilibrium world

price is 40 shillings.
If wheat from the rest of the world freely enters the UK market, the price of
wheat in the UK cannot stay at 90 shillings a unit.
At these prices, people will buy only foreign wheat UK producers will be
forced to start selling their wheat for 40 shillings a unit.
With free trade, the price of wheat in the UK will be no more than 40 shillings.
The decline in the UK price of wheat from 90 shillings to 40 shillings will

reduce supply in the UK and it will increase demand.
UK supply will no longer equal UK demand at a price of 40 shillings the

difference between UK supply and demand will be imported from other
countries.
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Recall our measure of economic welfare from semester one (EA only
students may wish to look at lecture 3 of block 1 for further review)
Consumer Surplus measure of economic welfare for consumers.
Remember the demand curve illustrates willingness to pay
Consumer surplus is the area below the demand curve and above the price.
E.G. if you value a cup of Starbucks for 3.00, and you buy it for 1.20, consumer surplus
is 1.80.
Producer Surplus measure of economic welfare for producers.

Remember that the supply curve illustrates the cost of production.
Producer surplus is the area above the supply curve and below the price.
E.G. if it cost you 10 to build a lawnmower and you sell it for 30, producer surplus is
20.
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Now lets suppose the UK government imposes an import tariff on foreign

wheat.
Assume that the tariff is equal to 10 shillings for every unit of wheat imported.
The price of foreign wheat sold in the UK will then be 40 shillings + 10 shillings
= 50 shillings.
Because foreign wheat is selling for 50 shillings in the UK, UK wheat producers
are now able to sell their product for 50 shillings as well.
UK wheat producers will produce more and UK wheat consumers will
consume less relative to the case without the tariff.
The difference between UK supply and UK demand will be smaller imports

to the UK will be smaller
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Imports fell from 80,000 to 50,000 units as a result of this 10 shilling tariff.
What happened to welfare in the UK?
It is clear that UK producers will be better off (sell more at a higher price)
It is clear that UK consumers will be worse off (buy less at a higher price).
It is clear that the UK government will earn revenue (50,000 units imported times a
tariff of 10 shillings per unit).
But, the losses to consumers are greater than the gains to producers and the gains to
the government.
This tariff reduces welfare in the UK. There is deadweight loss.

Remember that deadweight loss is surplus that is lost relative to the social optimum.
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After the tariff, 50,000 units of wheat were imported to the UK. Should
the UK set an import quota of 50,000 units a year instead of a tariff to
achieve the same result?
The price of wheat in the UK will still end up being 50 shillings following
50,000 unit quota.
Price in UK after quota will occur where UK Demand UK Supply = 50,000.
This happens at price of 50 shillings.
Consumers and producers will be just as well off under equivalent

tariffs/quotas.
But, the government typically does not earn any revenue (unless they sell
import licences). Welfare losses are therefore greater with quotas.
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In summary, trade restrictions usually generate deadweight loss.
Case Study: India and Apples
Source: Devadoss and Wahl Welfare Impacts of Indian Apple Trade Policies
Applied Economics (2004)
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Apple production only takes place in very few parts of India, but the Indian
government has implemented a 50% import tariff on apples.
For example, 10 worth of apples coming in from China will incur 5 in import
taxes.
As a result of this policy, the price of apples in India is much higher than it
otherwise would be.
Apple producers in India are happy, the Indian government earns revenue, but all
1.2 billion potential apple consumers are worse off.
Devadoss and Wahl (2004) estimate that relative to a case of no restrictions

effects of the import tariff are as follows:
Apple imports decreased by about 25%

Indian apple producers gain an additional surplus of 929 million Rs
The Indian government earns 2,270 million Rs in revenue
Indian apple consumers lose surplus of 10,077 Rs.
Therefore, there is a deadweight loss of 6,878 million Rs
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Are there any other problems associated with trade restrictions?
In addition to inefficiencies created, trade restrictions might be ill advised

as they may lead to retaliation from other countries.
Partly in response to the Corn Laws, for example, the Spanish government
increased the tariff on UK goods by 50 per cent.
Trade policies can therefore lead to trade wars between countries, where
protectionist policies are bilaterally applied as a form of punishment.
An example of a trade war: the United States imposed a series of tariffs in
1930 (Smoot-Hawley Tariff Act) - 60 countries raised tariffs on U.S.
products as a response.
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If the losses to the losers are larger than the gains to the winners, why are
inefficient protectionist policies being used?
The most simple argument is that the squeakiest wheel gets the grease.
The gains from free trade are

diffuse a lot of people benefit a
tiny amount. There is little
incentive to lobby government for
free trade (free rider problem).
The costs of free trade are
concentrated there exists a huge
incentive to try and influence
policy
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Arguments for Trade Restrictions
But there are economists and politicians that argue that some trade
restrictions might be okay.
Lets go over some of these arguments (there are more we could talk about).
Infant Industry Argument

Source of Revenue for Developing Governments
Way of Life
National Defence
Equality
Some more issues are raised in the required reading by Nobel Prize winner
Joseph Stiglitz.
If you are really interested in this, I can recommend the book Globalisation
and its Discontents by the same author.
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Infant Industry Argument
A country might potentially have a comparative advantage in some industry, but this
industry may be undeveloped and cannot compete with the mature foreign
competitors.
Argument is that the government should temporarily protect new industries with tariffs
and quotas until these industries are developed enough to compete with foreign firms
that are grown up.
The idea is that it takes time for firms in an industry to learn to compete or to take
advantage of economies of scale.
While domestic consumers will suffer higher prices in the interim, they will be better off
in the long run when the domestic industry is mature and costs are low.
This is a widely used argument in developing countries.

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In 1984, Brazil essentially banned the import of foreign computers to
protect their fledgling computer industry.
The problem is, the Brazilian computer industry never grew up. they
couldnt achieve prices as low as the US
Infant industry protection is very difficult in practice
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Source of Revenue in Developing Governments
Governments need to raise revenue to provide public goods and services.
Tariffs are a very cheap and easy way to raise revenue just put a few
customs officers at every port and border crossing.
For some countries this is a much more practical way to raise income than
monitoring the incomes and purchases of every single person and
business in the country.
In many developing countries, upwards of 60% of government revenue is
from import duties. In Canada, on the other hand, this number is about
2%
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Way of Life
The production of some products entails national pride and identity
This is an important argument for Japans protection of the rice industry

rice production is embedded in rural Japanese culture.
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National Defence
Some argue that countries need to produce certain products at home in
case of a conflict.
For example, some argue the United States should produce their own
steel if war breaks out the U.S. can produce their own weapons to
defend themselves.
Or, Norway should produce at least some food themselves in case there is
an international conflict after which food supplies from other countries
become insecure.
This argument, of course, is becoming less valid in todays world.
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This argument is often abused, however
The U.S. footwear industry had a hard time competing against low-price
producers from abroad and tried to get protection by claiming footwear is
important for national security
The president of the Footwear Industry of America testified before congress in

1984 that
In the event of war or other national emergency, it is highly unlikely that the
domestic footwear industry could provide sufficient footwear for the military
and civilian population We wont be able to wait for ships to deliver shoes
from Taiwan, or Korea, or Brazil, or Eastern Europe . [I]mproper footwear
can lead to needless casualties and turn sure victory into possible defeat
Quote from Pugel International Economics Ch 10
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Equality
Following free trade, people employed in jobs where their country is

comparatively disadvantaged will lose.
The gains to the winners will be greater than the losses to the losers, so in
theory governments can just redistribute income.
But does this happen in practice?
The cost of adjustment might be long and
painful.
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Summary
The growth in global trade has dramatically outpaced the growth in global
GDP.
One reason why countries is trade is that they are different. When countries
specialise according to their comparative advantage, they can be made better
off through trade.
Intra-industry trade is driven by economies of scale and a love of variety.
Trade protection can lead to deadweight loss relative to the outcome with no
government intervention.
Producers win, the government can earn revenue, but the losses to consumers
outweigh the gains.
However, there are many valid arguments for restricting trade in some
cases.
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Lecture 1 - Trade Overview

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Lecture 1 - Trade Overview

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What Good is Trade?

In EA (and the second semester of EPA) we will be discussing a variety of

Required reading associated with each lecture is posted to Learn.

For this term, you are going to be assessed on

General issues should be directed to the course administrator at

Academic queries should be directed to me, the course organiser, at

Please check the location of your tutorial in semester 2 on your

Why Do Countries Trade?

For every 1 produced in the United Kingdom in 2013, 0.31 worth

What determines a countrys trade balance?

Tastes of consumers for foreign goods

Export value Mill (% of Total)

UKs top import

Import value Mill (% of Total)

Source: ONS Pink Book

The opportunity cost of producing wine is less wool.

The opportunity cost of producing wool is lowest in Spain. Spain has a

With Trade and Specialisation

Now Spain can send wool to France in exchange for wine.

What will the terms of trade be?

Proven oil reserves

Winners and Losers

Winners and Losers

Consider the case of Argentina in the 1900s.

Winners and Losers

Winners and Losers

Who won and who lost?

Argentinian meat producers

American meat producers

Consumers around the world

Non-meat producing landowners in

In principle, it should be possible for the winners to compensate the losers

Winners and Losers

But how can we describe this?

Suppose it costs 100,000 to heat your

If you produce 2 cars, the average cost

If you produce 200 cars, the average

The average cost falls as more is

Suppose there are two countries (France

Overview of Trade Policies

Overview of Trade Policies

Overview of Trade Policies

Countries with Highest Tariffs (2011)

Ave. Tariff (Ad

Ave. Tariff (Ad

Fish and fish

Minerals and Metals

Wood, paper, etc

Overview of Trade Policies

Overview of Trade Policies

Government Procurement Some national governments will sometimes

Content Requirement A minimum percent of value added in every product

Overview of Trade Policies

In 1982, there was a French decree which

The Poitiers customs house had 4

All documents had to be in French (rather

All documents and VCRs were

Japanese VCR exports fell from 64,000 a

Economic Impact of Trade Restrictions

Economic Impact of Trade Restrictions

Lets explore the effects of a tariff on wheat and a quota on wheat.

Economic Impact of Trade Restrictions