Trade and markets ECON 103 GMU

Economic Trade

We trade with anyone anywhere.

Purpose of Trade

Trade allows access to goods, services, and resources from anywhere, benefiting both trading partners.

Adam Smith - Purpose of His Book

To expose the fallacies that were dominant in traditional economics.

Criticism of Mercantilism

Adam Smith believed mercantilism misunderstood the nature of wealth and trade, falsely treating wealth as fixed and trade as zero-sum.

Mercantilism

The economic system dominant in the 1800s believing wealth is fixed in amount and trade is zero-sum.

Main Belief of Mercantilism

That wealth is limited and one country's gain is another's loss.

Wealth in Mercantilism

Wealth equals money, and money equals wealth.

Definition of Wealth by Mercantilists

They equated wealth with the possession of money, especially gold and silver.

Zero-Sum Trade (Mercantilist View)

One person's gain is another person's loss; there is no net gain from trade.

Zero-Sum Trade under Mercantilism

Because mercantilists assumed the total amount of wealth in the world was fixed.

Imports (Mercantilist View)

Imports are bad because money leaves the country to pay foreigners for goods.

Discouragement of Imports

They believed imports drained national wealth by sending money abroad.

Exports (Mercantilist View)

Exports are good because the country gains money from selling goods to foreigners.

Encouragement of Exports

They thought exports brought wealth into the country through payments from foreign buyers.

"Beggar Thy Neighbor" Policy

Economic strategy where a country tries to grab as much of the world's fixed wealth as possible, leaving others poorer.

Meaning of "Beggar Thy Neighbor"

It means pursuing policies that make other nations poorer to increase one's own wealth.

Autarky

A situation where everything made in a country is consumed within that country (no trade).

Example of Autarky

A nation that produces and consumes everything domestically, refusing to trade with others.

Free Trade

System with no trade regulations, allowing countries to freely trade with others.

Support for Free Trade

It increases efficiency, promotes competition, and benefits consumers with lower prices and more variety.

Protectionism

Policies that restrict trade or limit foreign economic interaction to protect domestic industries.

Goal of Protectionism

To shield domestic industries and jobs from foreign competition.

Tension Between Free Trade and Protectionism

Conflict between promoting economic efficiency and protecting domestic jobs/industries.

Reasons for Tensions

Free trade helps consumers and efficiency, but can hurt domestic industries and workers.

Protectionists' Fear: Unemployment

Belief that free trade causes job loss when industries move abroad.

Free Trade and Unemployment

Companies may move production overseas where labor is cheaper, leading to domestic job loss.

Protectionists' Fear: Trade Imbalance

Concern that free trade leads to countries importing more than they export.

Definition of Trade Imbalance

When a country's imports exceed its exports, leading to concerns about debt and dependency.

Protectionists' Fear: Lower Wages

Belief that trading with lower-wage countries (like Vietnam) reduces wages in higher-wage countries (like the U.S.).

International financial trade

A type of trade relationship that reflects transactions between countries, such as when China buys large amounts of U.S. Treasury bonds.

Consumer impact of import bans

Consumers face higher prices and less variety, but domestic producers benefit when a country bans imports of foreign cars.

World Trade Organization (WTO)

A modern organization that supports free trade globally.

Mutually beneficial exchange

A type of trade that occurs when nations with different specializations trade technology, benefiting both.

Protectionism in agriculture

A form of protectionism where the government pays farmers not to import foreign crops.

Comparative advantage

An economic principle where countries specialize in producing certain goods and trade for others.

Great Depression and protectionism

The influence of the Great Depression led many countries to raise tariffs to protect jobs, worsening global trade collapse.

Economic effect of import quotas

Imposing a quota on imported electronics leads to reduced foreign competition and higher domestic prices.

Positive-sum trade

Trade that benefits both countries involved in a voluntary exchange.

Long-term drawback of limiting foreign competition

Loss of efficiency and higher consumer prices may result from limiting foreign competition to save factory jobs.

Free trade and consumer choice

An example of free trade increasing consumer choice is buying imported clothing, electronics, or food unavailable domestically.

Protectionist policies

Policies such as tariffs or quotas that a country might support when fearing its industries can't compete with cheaper imports.

Specialization in trade

Countries like Vietnam and the U.S. might still trade even if one produces shoes more cheaply, as each can specialize in what it does best.

Opposition to free trade agreements

Countries with high unemployment might oppose free trade agreements due to fears of losing domestic jobs to cheaper labor markets.

Impact of a stronger U.S. dollar on exports

If the U.S. dollar gets stronger, exports become more expensive to foreigners, reducing export demand.

Outcomes of opening up to trade

A developing country that opens up to trade may experience increased growth from access to new markets and technologies.

Mercantilism today

If every country followed mercantilism strictly today, global trade would collapse because everyone would try to export but never import.

Drawbacks of domestic production

A likely drawback of a nation trying to produce everything domestically is inefficiency and lack of access to foreign innovations.

Benefits of free trade for developing nations

Free trade can help developing nations by allowing them to sell goods to richer countries and grow economically.

Unintended consequences of tariffs

If the U.S. imposes taxes on imported solar panels, it might lead to higher prices for renewable energy at home.

Trade imbalance

A trade imbalance occurs when a country consistently buys more goods from others than it sells, like the U.S. with China.

Globalization and consumer benefits

Consumers might benefit from globalization by enjoying cheaper goods and greater product variety.

Protectionist subsidy

A government subsidy to a local industry to help it compete with imports is called a protectionist subsidy.

Non-zero-sum trade

When an economist says trade is not zero-sum, it means both sides can benefit through specialization and exchange.