International economics is growing in importance as a field of study because of

© 2010 Flat World Knowledge 1 Chapter 1

Introductory Issues: Trade History,

Institutions, and Legal Framework 1.The International Economy and International Economics oLearn past trends in international trade and foreign investment.oLearn the distinction between international trade and international finance.Section Outline •International economics is growing in importance as a field of study because of the rapid integration of international economic markets.•The overall annual exports measured in billions of U.S. dollars from 1948 to 2008 reveals an exponential growth in outflows and inflows.•World exports as a percentage of the world gross domestic product (GDP) for the years 1970 to 2008 exhibit steady increase in the share of trade in the world economy.•The sum total value of FDI around the world taken as a percentage of the world GDP between 1980 and 2007, gives an indication of the importance of foreign ownership and influence around the world.•The General Agreement on Tariffs and Trade, or GATT, prompted regular negotiations among a growing body of members to reciprocally reduce tariffs (import taxes) on imported goods.•Eight rounds of negotiations were completed between 1948 and 1994.•Uruguay Round, the most recently completed round, was finalized in 1994.Countries agreed to lower tariff, eliminate quota systems, and adhere to certain minimum standards to protect intellectual property rights.•The World Trade Organization (WTO) was created to manage the system of new agreements, to provide a forum for regular discussion of trade matters, and to implement a well-defined process for settling trade disputes that might arise among countries.•Regional free trade agreements have also prompted trade liberalization.•Globalization refers to the economic, social, cultural, or environmental changes that tend to interconnect peoples around the world.•What Is International Economics?▪It is a field of study that assesses the implications of international trade, international investment, and international borrowing and lending.▪International trade is a field in economics that applies microeconomic models to help understand the international economy.International Economics Theory and Policy, v. 1.0 Steve Suranovic (Instructor Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

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▪ International trade explains the effects of international trade on individuals and businesses and the effects of changes in trade policies and other economic conditions.▪ International finance applies macroeconomic models to help understand the international economy.

Key Takeaways

• International trade and investment flows have grown dramatically and consistently during the past half century.• International trade is a field in economics that applies microeconomic models to help understand the international economy.• International finance focuses on the interrelationships between aggregate economic variables such as GDP, unemployment, inflation, trade balances, exchange rates, and so on.

Exercise

1. Jeopardy Questions: As in the popular television game show, you are given an

answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

• Approximate share of world exports as a percentage of world GDP in

2008.

Answer: 30%

• Approximate share of world foreign direct investment as a percentage of

world GDP in 1980.

Answer: 5%

• The number of countries that were members of the WTO in 2009.

Answer: 153

• This branch of international economics applies microeconomic models to

understand the international economy.

Answer: International trade

• This branch of international economics applies macroeconomic models to

understand the international economy.

Answer: International finance

Additional Exercises

• Differentiate between the focus areas of international finance and international

trade.

Answer: International trade is a field in economics that applies microeconomic

models to explain the effects of international trade on individuals and businesses and the effects of changes in trade policies and other economic conditions.International finance applies macroeconomic models to explain the interrelationships between aggregate economic variables such as GDP, unemployment, inflation, trade balances, exchange rates, and so on.

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• With the help of worldwide statistics point out the growing importance of

international trade in the 21 st century.

Answer: The overall annual exports measured in billions of U.S. dollars from

1948 to 2008 reveals an exponential growth in outflows and inflows. World exports as a percentage of the world gross domestic product (GDP) for the years 1970 to 2008 exhibits a steady increase in trade as a share of the size of the world economy.

• Understanding Tariffs
• Learn the different methods used to assess a tariff.
• Measure, interpret, and compare average tariffs around the world.

Section Outline

• A tariff is any tax or fee collected by a government on imported goods.• Tariffs represent the primary way in which countries either liberalize trade or protect their economies.• A complete elimination of tariffs and other barriers to trade is referred to as free trade.• Tariffs may be levied in two ways: specific tariffs (levied as a fixed charge per unit of imports) and ad valorem tariffs (levied as a fixed percentage of the value of the commodity imported).• When a specific and an ad valorem tariff are levied on the same product simultaneously it is called a two-part tariff.• Countries have a tariff schedule that specifies the tariff collected on every

particular good and service. Example: The Harmonized Tariff Schedule (HTS) of

the United States.

• Measuring Protectionism: Average Tariff Rates Around the World

▪ One method used to measure the degree of protectionism within an economy is the average tariff rate.▪ Average tariff rates are less than 20 percent in most countries, although they are often quite a bit higher for agricultural commodities.▪ In the most developed countries, average tariffs are less than 10 percent.▪ On average, less-developed countries maintain higher tariff barriers.• Problems Using Average Tariffs as a Measure of Protection ▪ There are several different methods of calculating an average tariff rate, and each method can give a very different impression about the level of protection.▪ The simple average method adds up all the tariff rates and divides by the number of import categories.▪ The trade-weighted average tariff measure weighs each tariff by the share of total imports in that import category. This method divides the total tariff revenue by the total value of imports. 3 / 4

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▪ The average tariff rate on dutiable imports overstates the degree of protection. It considers categories in which a tariff is actually levied and ignores all categories in which the tariff is set to zero.▪ Tariffs are not the only trade policy used by countries.▪ Countries also implement quotas, import licenses, voluntary export restraints, export taxes, export subsidies, government procurement policies, domestic content rules, and much more.▪ Such regulations, restrictions, or impediments to trade, affecting both imports and exports, would not be captured using any of the average tariff measures.

Key Takeaways

• Specific tariffs are assessed as a money charge per unit of the imported good.• Ad valorem tariffs are assessed as a percentage of the value of the imported good.• Average tariffs can be measured as a simple average across product categories or can be weighted by the level of imports.• Although average tariffs are used to measure the degree of protection or openness of a country, neither measure is best because each measure has unique problems.• In general, average tariffs are higher in developing countries and lower in developed countries.

Exercises

1. Jeopardy Questions: As in the popular television game show, you are given an

answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

• The type of tariff assessed as a percentage of the value of the imported

good (e.g. 12% of the value of apples).

Answer: Specific

• The type of tariff assessed as a fixed money charge per unit of imports

(e.g. $0.35 per pound of apples).

Answer: Ad valorem

• Of increase or decrease, this is how tariffs would be changed if a country

is liberalizing trade.

Answer: Decrease

• Calculate the amount of tariff revenue collected if a 7% ad valorem tariff is

assessed on 10 auto imports with the autos valued at $20,000 each.

Answer: 7% of $20,000 = (0.07)x20000 = $1400. Then multiplied by 10 autos =

1400x10= $14,000.

• Calculate the amount of tariff revenue collected if a $500 specific tariff is

assessed on 10 auto imports with the autos valued at $20,000 each.

Answer: $500 tariff per auto imported => 500x10= $5000.

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