Trade and Economic Policies Overview

Trade, Economic Growth, Economic Development and Fiscal Policy

• The presentation discusses trade, economic growth, economic development, and fiscal policy. It addresses why engineers should care about these topics.
• The content outline includes overview, economic models of trade, reasons for trade between countries, trade barriers, case studies, economic growth, fiscal policy, and economic development.

Overview

• International trade involves countries acting as buyers and sellers.
• Questions regarding international trade, trade-driving factors, trade barriers, and significance for engineers are raised.

Production Possibility Frontier (PPF)

• The PPF graphically represents all possible output combinations of two goods given available resources.
• It illustrates the opportunity cost of producing one good relative to another.
• Points on the curve represent efficient production, points outside the curve are unattainable, and points inside represent inefficient production.

Production Function and Returns to Scale

• A production function links inputs (labor and capital) to output.
• A common example is Y = L^1/4 K^1/4, where Y = output, L = labor, and K = capital,
• Increasing returns to scale occur when increasing inputs leads to more than proportional output increase (HOD > 1).
• Constant returns to scale happen when increasing inputs leads to proportional output increase (HOD = 1).
• Decreasing returns to scale happen when increasing inputs leads to less than proportional output increase (HOD < 1).

Other Relevant Definitions

• Specialization: Focusing on producing one thing or a particular task increases efficiency and productivity.
• Comparative Advantage: A situation where an entity can produce something at a lower opportunity cost compared to others.
• Absolute Advantage: The ability to produce more of a good or service using the same amount of inputs compared to another entity.

A Bit More

• GDP (Gross Domestic Product): Total value of final goods and services produced within a country's borders during a specific time period.
• GNP (Gross National Product): Total value of all goods and services produced by a country's citizens, regardless of location, during a specific time period.

Modelling International Trade

• International Trade: The exchange of goods and services between countries.
• Exports: Goods and services a country sells to other countries, increasing national income.
• Imports: Goods and services a country buys from other countries, contributing to national expenditure.
• Trade Surplus: When exports exceed imports, leading to more money flowing into a country.
• Trade Deficit: When imports exceed exports, indicating an outflow of money from a country.

Models of International Trade

• Basic Ricardian Trade Model: A 2-country, 2-good model focusing on comparative advantage arising from differences in technology or natural resources.
• Heckscher-Ohlin Model: International trade is determined by differences in factor endowments (e.g. labor, capital).
• Increasing returns to scale: A cause for international trade.
• Gravity models: Explain international trade based on distance between countries and relative economic sizes.

Trade Barriers

• Tariffs: Taxes imposed on imported goods.
• Quotas: Limitations on the quantity of imported goods.
• Subsidies: Governmental support for domestic export-oriented industries to enhance international competitiveness.
• Embargo: A complete ban on trade with a specific country.
• Currency Devaluation: Intentional reduction in currency value to make exports more attractive and imports less desirable.

Are Trade Barriers Good?

• International trade offers consumers access to diverse commodities at potentially lower prices.
• However, trade barriers can be crucial for developing industries and promoting innovation.
• Reasons for protectionism and opinions on free trade are discussed.

United States and China

• China and the USA are significant trading partners, but the value of US imports from China frequently exceeds exports. The presentation wonders what consequences US trade restrictions might have on companies and consumers and looks for alternatives.

Economic Growth

• Economic growth involves expanding an economy's productive capacity, resulting in more goods and services.
• GDP per capita is a common measure of economic growth (GDP divided by population).
• Economic growth relates to increased consumption.
• Growth quality is often more important than pure quantity increases.

Economic Growth (Continued)

• Various growth models exist (classical, neoclassical, endogenous).
• Measuring economic growth is complex, and GDP per capita has limitations.
• Developing economies are traditionally thought to experience faster growth, eventually catching up to developed economies.

Economic Growth (Continued)

• Economic growth is not the sole measure of a nation's well-being.
• Other factors (e.g., health, education, environmental quality) significantly impact living standards.
• Measurement approaches beyond GDP per capita for assessing overall economic success are considered.
• Uneven distribution may mean that growth benefits some more than others.

Aggregate Demand

• Aggregate demand is the overall demand for goods and services in an economy during a specified time.
• The formula presented in the slideshow is Y = C + I + G + (X – M) where:
  • Y = National income
  • C = Consumption
  • I = Investment
  • G = Government expenditure
  • X = Exports
  • M = Imports

Components of Aggregate Demand

• Consumption: Individual spending on goods and services.
• Investment: Spending on capital assets, future returns, or improvement in productivity.
• Government expenditure: Government spending, such as on public services and infrastructure.
• Exports: Sales of goods and services to foreign countries.
• Imports: Purchases of goods and services from foreign countries.

Fiscal Policy

• Fiscal policy is government spending and taxation to meet economic targets.
• When used strategically, fiscal policies can achieve or support increases in economic growth.
• Some policies might increase consumption, investment, exports and reduce imports.
• The effects of using fiscal policy include inflation, unemployment, and environmental consequences that need consideration.

Expansionary Fiscal Policy - Economic Growth

• Increasing consumption, boosting government spending to improve consumer incomes and investment conditions, increasing exports through subsidies and tax breaks are discussed as methods to stimulate economic growth.

Other Effects?

• Increased demand from expansionary fiscal policies may lead to inflation.
• Increased demand and production may lead to decreased unemployment.
• A positive impact on an economy does not always lead to positive environmental and societal outcomes.

Economic Development

• Economic development goes beyond growth, focusing on improving quality of life, well-being, capabilities, and opportunities for individuals.
• Measures of development include literacy, life expectancy, and poverty reduction focusing on several dimensions.

This quiz covers fundamental concepts related to international trade, economic growth, development, and fiscal policy, emphasizing their relevance to engineers. Key topics include trade models, barriers, case studies, and the Production Possibility Frontier (PPF), illustrating efficient production and opportunity costs.