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Poli 243- Chapter 7 Notes.docx

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Political Science
POLI 243
Mark Brawley

Chapter 7 The Politics of trade th February 5 2013 Main questions:  Which countries benefit from trade?  Does it matter whether one country benefits more than another?  Who gains from trade within the country?  Whom does trade hurt? The reasons for conducting trade: Comparative advantage  Adam Smith 1776: argument that trade takes place because free trade is mutually beneficial  David Ricardo: comparative advantage refers to an actor’s ability to produce a good or service more efficiently than another actor’s o If one country can manufacture paper more efficiently (use fewer input, namely capital and labor to produce a unit of paper, and therefore cheaper) it can shift all its resources into producing that good o If each country does this, more of each good gets produced at a lower cost in terms of inputs consumed o There are therefore lower cost in terms of inputs consumed and more goods to go around through trade, and overall consumption increases, and everyone benefits  Trade is therefore involves specialization and a division of labor o Improved efficiency and production of a greater volume of goods and services o Production Possibility Frontier (PPF) the limit of a country’s production in a limited period of time o Rate of transformation: production can be shifted among two products o Comparative advantage takes place when one country can produce an item at a lower cost in terms of opportunities foregone than can the other country o Absolute advantage takes place when a country can use fewer resources to produce a product than the other country  It does not replace comparative advantage in that each country still has different prices for the products domestically The Consequences of specialization  According to the critics of neo-classical economies, the division of labor from the comparative advantage trade structure may have serious political and economic repercussions o Modern world system  southern Baltic Region in the 1600s  As trade first began to boom in early capitalism, the regions in Eastern Europe specialized in the production of grain, which they exported to the Netherlands, which was more urbanized  In order to have wares to exchange grain for other foods, the Netherlands specialized in manufacturing a variety of goods, such as textiles, and as time went on, the Netherlands became more industrialized and wealthier  Eastern Europe continued to produce grain and failed to industrialize, and did not get substantially richer  Politically, the trade had enormous consequences because within eastern Europe, trade increased the wealth of those who held the most land, the aristocrats and Trade enabled the landholders to continue to wield both economic and political power for centuries in these regions  In the Netherlands, the aristocrats declined in power and wealth as the merchant class ascended  Some states enter into the international division of labor and get frozen in a place, and unable to escape the economic role in which they are initially cast  Since trade does not necessarily benefit states in the Marxist analyst, and does not benefit states equally, there are important repercussions to being in one role or another – being at the top of the international division of labor is much better than being at the bottom o Realists: States are pursuing power, not wealth  States want relative gains, not absolute gains  States are concerned with becoming richer than their neighbors not just richer than they have been in the past  Each state wants more money  States will want their neighbors to enforce tree trade, while they apply protectionist policies, allowing the state pursuing the protectionist policies to control the distribution of gains from trade more directly than otherwise  Prisoner’s dilemma: two self interested actors, worried about relative gains will make the outcome less than socially optimal through their action, and both would be better off with free trade, but because both cheat, the outcome is rampant protectionism The Domestic Impact of Trade:  Hecksher and ohlin: each country can be assessed in terms of its endowments of
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