February 11, 2009
International sector is most important sector
Foreign Exchange Rates-Todaro
If a country has a higher labor productivity in producing two products, one country will gain, one country
International trade theory-If both countries specialize, each country will achieve gains from trade.
Crewman says this is wrong.
Argument for protectionism-free trade improves resource allocation, protectionist policy, infant industry
argument can be justified as it improves resource allocation
Infant industry tariff-a country wants to industrialize, specialize in 1 industry
Look at an industry to be developed. Have a small industry, want to protect it. Impose strong
protectionist measures, 100% tariffs. Block imports from coming in. Domestic producer has whole
market to work with. As industry grows, need more products, expand for more production units.
Initially, it was a high cost producers (high AVC). More plants will be produced, more efficient plants,
larger, obtains better technologies. Achieves strong increasing returns to scale. Domestic market
growing, lower unit price. Efficient low cost industry that can stand on its own, tariffs can be taken away.
Learning curve-once only increase in labor productivity in first year, no new inputs, gain experience
Post war tariff cuts-<vvÇZ}µv[òð-67, Tokyo 73-[óõ~tdKUhPµÇZ}µv[ôò-Zõì
Tariffs on intermediate and final goods are low
US, Canada have high tariffs on agriculture, price of rice in Japan with import tariffs is at least 3 times
what the world price is. In Europe, the sugar industry is protected by restriction on imports, 3-4 times of
If tariffs were gotten rid of, developing countries can increase their exports dramatically. US cotton
should not be subsidized.
North-south trade (industrial and developing)-Ruttan
-Assume that the north has a comparative advantage in electronics, high skilled labor, south has a
comparative advantage in textiles, low skilled workers,
-If electronics is expanded, increase in demand for skilled workers, reduced demand for unskilled
workers (Price of skilled worker/price of unskilled workers) ratio will increase, improve relative wages of
skilled workers against unskilled.
-in the south, the ratio would fall, the relative wage of unskilled workers will rise