1、1Advanced Intensive Core Course (AIC) International EconomicsLecture 1: Modern trade theory and the new theory of protection 20. OutlineCourse information New international trade theory: competitive advantage and economies of scale (EOS) New theory of protection: the role of domestic divergences 31.

2、 Course informationLecturer: Dirk Veestraeten (Dirk.Veestraetenuva.nl and D.J.M.Veestraetenuva.nl, office hours: Fridays, 14.00-15.30, room: E08.07)A study guide with all practical information is available on Blackboard of International Economics AICPrerequisites:IEB-basisvak 1 (Handel) + IEB-basisv

3、ak 2 (Monetaire Stelsels), orInternational Trade + International Money41. Course informationCourse:Deepening of existing knowledgeIntroduction of new concepts and topicsTwo parts: international trade (2 weeks) and international money (5 weeks)The level of this course is equivalent to that of the Mas

4、ters Course International Economics 51. Course informationLectures on Mondays, 13.00-14.45 (room C), except for the lectures of Monday 31 August and 21 September that will take place on Tuesday 1 September and 22 September, 18.00-20.00 (room C) Main lines mandatory literature of the week in question

5、Explanation underlying structure of more complex topicsPowerPoint slides will be made available via Blackboard before the lecture in question (Saturdays at the latest at 22.00)61. Course informationTutorials on Wednesdays, 13.00-14.45 (group 1, E0.10) and 15.00-16.45 (group 2, E0.10) and on Thursday

6、s, 13.00-14.45 (group 3, E0.10) and 15.00-16.45 (group 4, E0.10):Exercises (available on Blackboard on Fridays before 18.00)Three optional assignments: one of the exercises. Weeks 2, 4 and 6One compulsory essay (a file with useful tips on writing essays and theses can be found on the Blackboard-site

7、 of the course)71. Course informationTutorials on Wednesdays, 13.00-14.45 (group 1, E0.10) and 15.00-16.45 (group 2, E0.10) and on Thursdays, 13.00-14.45 (group 3, E0.10) and 15.00-16.45 (group 4, E0.10):Groups of four students (membership is to be communicated at the first tutorial) for preparing t

8、he optional assignments and the compulsory essayAssignments are to be handed in on Tuesdays before 16.00.81. Course informationCourse reader:Articles from books and journalsInspection copies: at the secretariat of General Economics (E07.03)Exam materials: everything!Course readerAll materials on Bla

9、ckboard (PowerPoint slides of lectures, exercises and solutions to the exercises)91. Course informationExam:Written exam, 3 hoursAnswer in a concise manner, but make sure to clearly signal your knowledge (a simple “yes” is not sufficient)Final grade:If assignments are written: written exam (80%), as

10、signments (10%) and compulsory essay (10%)If no assignments are written: written exam (90%) and compulsory essay (10%)101. Course informationFinal grade:Boundary condition for passing: overall grade should be at least 5.5 (no rounding) and grade written exam at least 5 (no rounding)Grade assignments

11、 will not negatively affect the final grade (however, the grade of the essay can negatively affect the final grade)112. New international trade theory: competitive advantage and economies of scale (EOS)2.1. Classical models and beyondRicardo: comparative advantages due to differences in labour produ

12、ctivityHeckscher-Ohlin-Samuelson: comparative advantages due to differences in factor endowmentsThus: trade in the classical and neo-classical models arises due to differences between countries122. New international trade theory: competitive advantage and economies of scale (EOS)2.1. Classical model

13、s and beyondBut: observation shows us that the bulk of trade takes place among countries that are very similarShift of focus in trade theory since the 1960s towards differences at the level of the firm or industry132. New international trade theory: competitive advantage and economies of scale (EOS)

14、2.1. Classical models and beyondIn summary:Comparative advantages: advantages on the national level - Ricardo, Heckscher-Ohlin-SamuelsonCompetitive advantages: advantages on the level of the firm or industry - New international trade theory: imperfect competition due to EOS and product differentiati

15、on142. New international trade theory: competitive advantage and economies of scale (EOS)2.2. Economies Of Scale (EOS)External or industrial EOS: these EOS do not accrue at the level of the individual firm, but accrue to all firms of the sector in questionPure (or technological): affect the producti

16、on function of all firms in the sector (e.g. higher skills of labour input)Pecuniary: transmitted by the market through price effects for all firms of the sector (e.g. cheaper inputs)152. New international trade theory: competitive advantage and economies of scale (EOS)2.2. Economies Of Scale (EOS)I

17、nternal or firm-specific EOS: these EOS do accrue at the level of the individual firmWe will now examine internal EOS in relation to international trade:International trade can destroy national monopolies ( petitive effect of international trade)International trade can lead to a global monopoly162.

18、New international trade theory: competitive advantage and economies of scale (EOS)2.3. petitive effect of international tradeFigure 3.2 Monopoly destructionSource: Nielsen, J.U.-M., E.S. Madsen and K. Pedersen (1994), p. 30 172. New international trade theory: competitive advantage and economies of

19、scale (EOS)2.3. petitive effect of international tradeFigure 3.2 represents the cost and revenue structure for a specific product in one particular country. The same structure also applies to the numerous other countries in the world.The curve that bears no name is the Average Cost (AC) curve that i

20、s initially downward sloping, reaches a minimum and then increases (keep this in mind).In the autarky situation, i.e. prior to opening to trade, the market for the product in country H will be in the hands of a domestic monopolist with price pH and production qH.182. New international trade theory:

21、competitive advantage and economies of scale (EOS)2.3. petitive effect of international tradeOther countries: same cost and revenue structure such that in autarky the world consists of a national monopoly in each of the numerous countries.What happens when borders are opened, i.e. when the countries

22、 engage in free trade?A global market for the product in question is createdThis move towards free trade here leads to a perfectly competitive world market (no global monopoly) or the national monopolies are destroyed.192. New international trade theory: competitive advantage and economies of scale

23、(EOS)2.3. petitive effect of international tradeWhy destruction of national monopolies?The AC curve does not continue to decrease: initially it is downward sloping, but after point q0 it starts to rise again.Thus, expanding production beyond point q0 is not optimal for the producer in question and t

24、hus no global monopoly can arise since producing q0 is simply not enough for satisfying the entire world demand.202. New international trade theory: competitive advantage and economies of scale (EOS)2.3. petitive effect of international tradeIn fact a perfectly competitive world market will arise:AC

25、 is minimised at q0 for each of the producers, which is above domestic demand q1 .Producers thus produce q0 and sell q0 q1 on the world market.Thus, on the world market the numerous national producers will start to compete and this creates a perfectly competitive world market ( petitive effect).The

26、price decreases to pW and since total world supply initially exceeds world demand, some producers will not survive.212. New international trade theory: competitive advantage and economies of scale (EOS)2.3. petitive effect of international tradeWill the domestic producer/monopolist survive the destr

27、uction of the national monopolies?This cannot be assessed within this figure since the numerous domestic monopolists were assumed to be identical.However, only those that react quickly and quickly start to exploit the internal EOS will survive (they will end up producing q1 at pW for the home market

28、 and to export q0 - q1 at pW). This is the so-called “first-mover advantage”.222. New international trade theory: competitive advantage and economies of scale (EOS)2.4. International trade can lead to a global monopolyFigure 3.3 A global monopolySource: Nielsen, J.U.-M., E.S. Madsen and K. Pedersen

29、(1994), p. 31232. New international trade theory: competitive advantage and economies of scale (EOS)2.4. International trade can lead to a global monopolySuppose now that the world consists of only two countries, namely Home (H) and Foreign (F) and these two countries each have one producer that mor

30、eover is completely identical in terms of costs and revenues. “Realistic” example: large commercial airplanes.In the autarky situation, i.e. prior to opening to trade, there are two national monopolies (with price pH and price qH in country H; and thus the same in country F).242. New international t

31、rade theory: competitive advantage and economies of scale (EOS)2.4. International trade can lead to a global monopolyEffect of moving towards free trade?A global market is created or the two monopolists are now confronted with the demand DH+F (i.e. the horizontal additional of demand in the two coun

32、tries)In order to fully exploit the internal EOS, production should be extended further and further (AC keeps on decreasing in Figure 3.3).The ever-decreasing AC curve means that ultimately one producer can produce the entire world demand252. New international trade theory: competitive advantage and

33、 economies of scale (EOS)2.4. International trade can lead to a global monopolyThis leads to a “fight” in order to be the first to expand production and thus to benefit from the ever-decreasing average costs (“first-mover advantage”).Result: only one of the monopolists survives and thus a global mon

34、opoly arises. In Figure 3.3: the producer of country H survives and production will be at MR = MC, i.e. at qW, and the price will be at pW=pH.262. New international trade theory: competitive advantage and economies of scale (EOS)NoteThe above figures were very “simple” (e.g. they assumed identical d

35、emand structures and identical producers across the world).This obviously simplifies analysis. However, it also clearly illustrates that international trade can emerge even when absolutely no country-specific differences are present (unlike what Ricardo and Heckscher-Ohlin-Samuelson assumed)273. New

36、 theory of protection: the role of domestic divergences3.1. Traditional viewThe use of trade policy, e.g. the introduction of an import tariff, can only improve welfare in the case of a big country (cf. the terms-of-trade gain)Trade policy is certainly not rational for small countries.However, in re

37、ality also small countries (intensively) use trade policy. According to the new theory on protection this is not necessarily irrational.283. New theory of protection: the role of domestic divergences3.2. New theory of protectionTrade policy can improve national welfare also for small countries if an

38、d only if (marginal) domestic divergences are present.(Marginal) domestic divergences are differences betweenPrivate and social costs (i.e. differences between private and social supply (S)Private and social benefits (i.e. differences between private and social demand (D)293. New theory of protectio

39、n: the role of domestic divergences3.2. New theory of protectionDifferences between private and social S:Positive externalities (e.g. knowledge spill-overs): private S lies to the left of social S (given a specific volume, social costs are lower than private costs): private supply is too smallNegati

40、ve externalities (e.g. pollution): private S lies to the right of social S (given a specific volume, social costs are larger than private costs): private supply is too large303. New theory of protection: the role of domestic divergences3.2. New theory of protectionDifferences between private and soc

41、ial D:Positive externalities (e.g. demand for solar panels): private D lies to the left of social D (given a specific volume, social benefits are larger than private benefits): private demand is too smallNegative externalities (e.g. excessive use of cars): private D lies to the right of social D (gi

42、ven a specific volume, social benefits are lower than private benefits): private demand is too large313. New theory of protection: the role of domestic divergences3.2. New theory of protectionCentral features of the new theory of protection:Private accounting does not reflect all costs and benefits

43、and government intervention thus can drive private D and S to socially optimal levels.Trade policy can be used to drive private D and/or S to socially optimal levels and then can increase welfare even for small countries when large enough positive externalities can be obtained and/or large enough ne

44、gative externalities can be avoided.323. New theory of protection: the role of domestic divergences3.2. New theory of protectionWarning:Trade policy should not be studied in isolation. It should be compared to other instruments that also can drive private D and/or S to socially optimal levels.All po

45、ssible instruments are to be classified in terms of the distortions they create. This classification should rank them in terms of the welfare that is generated/destroyed - a hierarchy of policies then arises (see below)333. New theory of protection: the role of domestic divergences3.3. Use of a prod

46、uction subsidy: first-best measureFigure 2.1Source: Corden, W.M. (1997), p. 7343. New theory of protection: the role of domestic divergences3.3. Use of a production subsidy: first-best measureThe initial situation:The product is an importable or the country in question is importing the product in qu

47、estion.The line PP is the price at which the product is imported (it is a flat line or the country in question is small since its demand and supply have no effect on PP)The line DD is the domestic demand line. The lines GG and HH are the private and the social supply curves, respectively.353. New th

48、eory of protection: the role of domestic divergences3.3. Use of a production subsidy: first-best measureThe initial situation:Social costs are lower than private costs due to the existence of positive externalities (knowledge spillovers, etc).Production thus should be increased from a societal point

49、 of view.Suppose that the government desires to increase domestic production from level A to level C.363. New theory of protection: the role of domestic divergences3.3. Use of a production subsidy: first-best measureA production subsidy can obtain this goal without raising the price to the consumer

50、(i.e. no consumption distortion arises): an ad valorem production subsidy SP/OP will increase domestic production from level A to level C. The domestic price will not be influenced since imports can still be obtained at the price P or the price to the consumer after the production subsidy remains at

51、 the level P (domestic producers cannot raise their prices).373. New theory of protection: the role of domestic divergences3.3. Use of a production subsidy: first-best measureWelfare effect: + KNL:The social cost of the additional production is AKLCThe (social and private) cost of importing would ha

52、ve been ANLC. The welfare gain then is KNL.Exercise: the gain KNL also corresponds to the sum of the change in the consumer surplus, the change in the producer surplus, the change in the government revenues and the change in the social benefits.383. New theory of protection: the role of domestic div

53、ergences3.4. Use of an import tariff: second-best measureFigure 2.2Source: Corden, W.M. (1997), p. 9393. New theory of protection: the role of domestic divergences3.4. Use of an import tariff: second-best measure Again:A positive externality exists in production.The government desires to expand dome

54、stic production from level A to level C.However, it now chooses to apply an ad valorem import tariff of SP/OP. This increases the price to the consumer or a so-called “by-product distortion” emerges.403. New theory of protection: the role of domestic divergences3.4. Use of an import tariff: second-b

55、est measure Welfare effect: + KNL FEQEffect on the production side: + KNL as the social cost of the additional production is AKLC whereas the (social and private) cost of importing would have been ANLC, which is larger by KNL.Effect on the consumption side (i.e. the by-product consumption distortion

56、): -FEQ. This is the reduction of demand times the difference between the original cost of the good and the willingness to pay for the entire reduction in demand.413. New theory of protection: the role of domestic divergences3.4. Use of an import tariff: second-best measure Welfare effect: + KNL FEQ

57、The total welfare effect obviously can be positive or even negative depending on the elasticities of demand and supply.Exercise: the gain KNL FEQ also corresponds to the sum of the change in the consumer surplus, the change in the producer surplus, the change in the government revenues and the chang

58、e in the social benefits.423. New theory of protection: the role of domestic divergences3.4. Use of an import tariff: second-best measure Thus:The welfare effect of a trade-policy measure can be positive for this small country unlike what was the message from traditional analysis.However, welfare wi

59、ll be lower in the case of trade policy when compared to the case of a production subsidy, hence trade policy is second-best and the production subsidy is first best433. New theory of protection: the role of domestic divergences3.5. Additional concepts1. Noneconomic objectives (emotional value, political value, self-sufficiency, etc): the reasoning remains basically the same, although the value of such objectives and their proclaimed externalities is harder to determine