chapter 5 - trade & macro 5.1 macroeconomic factors – exchange rates – interest rates –...
TRANSCRIPT
Chapter 5 - Trade & Macro
5.1 Macroeconomic Factors
– exchange rates– interest rates– government fiscal balance
5.2 International Agricultural Trade
–Trade agreements
5.3 Trade Theory
–Gains from trade–Distortions (tariffs & subsidies)–Farm programs
1) Exchange Rates
Affects the competitiveness of agr. Products
Early 1970’s – floating exchange rates
Policy – over or under value exchange rate
What is the impact of a ER distortion?
Example 1:
Argentina: Overvalued Exchange Rate (exporter)
Shift of excess demand functionLower producer priceLower quantity exportedLoss of producer surplus
Canadian $ and Euro per $US (IMF/IFS)
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Source: International Monetary Fund -IFS
P
Q
S
ED
Increase in Exchange Rate
Interest Rates:
Why interest rates are important:
1) Value of currency – prices received and paid
Most commodities are US$ denominated
2) Cost of borrowing:
Agriculture is capital intensive (borrowing)
Inputs: seed, fertilizer, machinery
1980’s - high interest rates – low grain prices- debt crisis
Cost of borrowing: How is it determined ?
Role of central bank (Bank of Canada)Role of the marketGovernment intervention (interest subsidies)
100 Basis points = 1%
Src. Globe & Mail - March 8, 2008
Government Fiscal Balance
Consequences for Agricultural Policy
1 – interest rate
- more borrowing = higher rates
"crowding out effect"
- higher cost for farm borrowing
2001 Average capital/farm = $800,000
Total farm capital = $ 200 Billion
1% change in interest rates => $ 2 Billion
(1971 - 2002) - Net market income
- 1.8 $B (2002) 3.3 $B (1975)
2 – capacity to fund interventions
- deficits = limited marge de manouvre- reduced scope for intervention
5.2 International TRADE
Gains from trade:
> increase in output due to specialization based on comparative advantage
• each country – concentrates on producing goods and that it produces
relatively efficiently– trading to obtain goods that it does not
Trade Distortions
• many forms of distortion (welfare reducing)• tariffs, taxes, subsidies, quantitative measures• non-tariff barriers (health, safety reg’s)
Trade Agreements
• institutional arrangement – restraint on behaviour• multi-lateral (regional), bilateral
• Levels of cooperation– Range of goods (agr vs industrial)– Scope of instruments included– Customs union – full economic integration (EU)
Reasons for Protection
• new industry (infant industry argument)
• national health + phyto-sanitary
• unfair foreign trade policy
• Defend domestic programs
• improve balance of payments
• improve “Terms of Trade”
• generate revenue
• slow down painful economic adjustment
• Political economy
benefits of additional trade are spread thinly among many individuals but the cost is high for only a few firms or groups
Trade Theory
• Why do nations trade? • What are the benefits?• Implications of trade distortions
Theory
• comparative advantage (Ricardo)• absolute advantage
• Ohlin (1933) • comparative advantage
– due to resource endowments– Canada land rich, capital poor
– => export agr & import manufactures
Gains from trade
• Trade allows for specialization – increased welfare
CA
M
A
US
M
A
P
P
P
P√√↵
>√√
↵
Gains from Trade
.
Agr.
Manufactures
P1
P2
W1 W2
ES/ED Framework
• Excess Demand (ED)• Excess Supply (ES)
Gains from trade (versus no trade)
• depend on the impact of a country on world prices
• Small country – no price impact• Large country – prices adjust, impacts smaller
2 Country Model – 1 good
• e.g. US/Canada cattle market
• Assume: Canada - low cost producer
• How are consumers and farmers affected by trade between the two countries?
• Winners and losers – distribution effects
– US – consumers gains, farmers lose– CA – consumers lose, farmers gain
Gains from Trade
.Canada USTrade Sector
ED
ES
PW
PUS
PCA
Trade
WUS
WCA
Analysis: Trade Distortions
1 ) Import Tariff• Fixed-tariff rate vs ad valorem
• Small country (fixed tariff)
– domestic price increases
– Supply increases, demand decreases
– imports reduced
– Net dead weight loss
• Large country
– domestic price increases
– world price decreases
– Imports decrease; domestic output increases
– Consumers lose; producers gain
– Government gains tariff revenue
– Net welfare gain
– Potential to compensate consumers
Import Quota
• Binding quota
– if it restricts imports below free trade imports
• Similar price effects to a tariff
– Imports lower
– Domestic price higher
– World price lower
– Rents to importers
• Quota value: right to import– Based on difference between new world price and
domestic price
Large Country – Import Quota
World MarketDomestic Market
ED0
ES
S
D
Pw
.
Q
PQ
IQ
PWQ
Large Country - Tariff
.
World MarketDomestic Market
ED0
ED1
ES
S
D
PwTR
Import tariff – Small Country
Pw
PT
S
D
ab G income
Government income – few transactions
Export Subsidy
• Used extensively
– Purpose: support domestic income (price) support– Subsidy to export the excess supply– US (EEP) starting in 1985– EU (ERP) – export restitutions – 1970’s– not unique to agriculture – e.g. Bombardier
• price support program – increases ES
• Subsidy Impacts– world price falls (large country)– Domestic price falls– Exports expand– Government payments = (Ps-PWs)*exports
• value of exports increase relative to free trade
• Deadweight loss– Consumers gain– Producers gain– Foreign importers gain– Taxpayer loses
Export Subsidy – Large Country
Dd – domestic demandDT – total demand – including world demand
Pw
Pws
S
DT
Dd
Ps
Exports BeforeExports After
DWL
Export Tax
• Tax exporters
• Exporting government gain revenue from export taxes
• Producers in exporting country lose
Export Cartel
Assumptions:• 2 countries• Cartel: importer + domestic supplier• Suppliers maximize joint profits• Price according to joint supply function• MR = MC (joint MC)
Results:
• Domestic price increases• Imports and domestic production decrease• Foreign surplus increases• Deadweight loss
Export Cartel
.
ImporterExporter
S
Pw
MR
D
Sd
ST
Sd – domestic supplyST – domestic + foreign supplyExporter gain = (a-b)Deadweight loss = c
PC
QE Qd
a
b
c
Q
Decoupled Subsidies
• Programs that do not distort trade– within the green box category under GATT
• policies that lead to a per-unit payment to producers are not decoupled
• trade distorting => affects trade and prices
• Is any farm program completely decoupled ?