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ECO100Y1 (438)
Jack Carr (32)

Free Trade vs Import Substitution

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Jack Carr

Feb 25, 2009 NEWS: US needs more industrial strategies -the China informal sector is huge and growing, agricultural sector is huge, social unrest -global downsizing has affected all Asian countries from Japan to Thailand, trade is slowing down, export to US has dropped significantly, industrial production levels are dropping as well -If export goes down, many of Chinese migrant workers will be out of jobs, speed and ferocity of global downturn has taken everyone by surprise -Expected GDP for India 6%-6.5% growth, Japan 1.3% to -1.7% this year, South Korea, from 4.7% to 0.6%, China 9.3%-7.4% International Trade -international sector is the most important, investment rate is the biggest decision countries have to make, biggest constraint on growth is insufficient foreign exchange, most economic crisis in the world have been foreign exchange issues. -as transformation takes place, increase in demand for foreign exchange, marginal propensity to import rises, more machinery needed, greater stress on foreign exchange earnings Free TradeImport substitution Protectionism -there is improved resource allocation from each strategy, freer trade, economies of scale Risks associated with either strategy-synthetics development(substitute goods), eg. silk in Japan, raw rubber in Asia, -recycling, most of the trade is north-south trade (industrial to low-income countries trading), -Free trade-risks will reduce the gains from trade Protectionism-]LZ]o]]}L]Z7ooZL]Z7Z}L7,]Z ZKL7o]Ll2ZLLo]]Z7}L[ have questions on RodanHirschman on TEST 2 Chenry-Real world and International Trade theory differences 1) Input prices in developing countries are not at market-clearing level, theory assumes that they are, basic rate is too high, too much unemployment, interest rate obtained by new investment is too low, some kind of subsidization, foreign exchange rates are fixed(shortage on foreign ZL27}L[ZL}2Z7oL }KL] ]7ooZ}}}LZ} market-clearing level 2) Quantity and quality of factors change in the standard trade theory model, assumes factor endowments are fixed, the quantity and quality of labor capital does not change. These countries grow 3) Increasing returns to scale exist, hard to measure, firms and industries specialize, become more efficient, lower unit cost, the trade theory starts with pure competition, have only constant returns to scale, solution in LR is constant returns 4) Other externalities in education, social overhead that are ruled away in international trade theory-assumes no externalities, economic development programs yields externalities. Trade Theorist-gains from trade are real Reading 10.2-krugm-
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