Camila Torres : 1-4

Karen: 5-8
Camila: 9-12
Alejandra: 13-16
Otero: 17-20
Juan: 21-24
Valeria: 25- 28
Forero: 29 -32
Daniel: 33 - 36
Tellez: 37 - 40.
Mariana: 41-44
Kevin: 45-48

1. Define the concept of economies of scale in detail, also differentiating between the internal
and external concepts.

The economies of scale or increasing returns make it advantageous for each country to
specialize in the production of only a limited range of goods and services, it can produce each
of these goods at a larger scale and hence more efficiently than it tried to produce everything.
Internal economies of scale occur when a firm decreases costs and increases production,
external economies of scale produce into the industry and not into a company

2. Indicate how the general market structure tends to look like under strong internal and external
economies of scale.

The external economies of scale occur when the cost per unit depends on the size of the
industry but not necessarily on the size of any one firm and the internal economies of scale
occur when the cost per unit depends on the size of an individual firm but not necessarily on
that of the industry

3. What are Alfred Marshall’s reasons behind the emergence of economies of scale. Give clear
examples for each. (140)

• The production is more efficient the larger the scale at which it takes place.
• Doubling the inputs to an industry will more than double the industry’s production:
Widgets are produced using only one input, labor. To produce 10 widgets, for
example, requires 15 hours of labor, while to produce 25 widgets requires 30 hours.
The presence of economies of scale may be seen from the fact that doubling the input
of labor from 15 to 30 more than doubles the industry’s output—in fact, output
increases by a factor of 2.5
• The existence of economies of scale may be seen by looking at the average amount of
labor used to produce each unit of output: If output is only 5 widgets, the average
 labor input per widget is 2 hours, while if output is 25 units, the average labor input
falls to 1.2 hours.

4. Explain three main reasons why firms cluster.

Reasons:
• Specialized suppliers: It´s the ability of a cluster to support specialized suppliers like
Silicon Valley, this independent equipment sector promoted the continuing
formation of semiconductor firms by freeing individual producers from the expense
of developing capital equipment internally and by spreading the costs of
development
• Labor market pooling: The way that a geographically concentrated industry allows
labor market pooling for workers with highly specialized skills, one example of this
is the Skolkovo Technopark District which is like a Russian Silicon Valley
• Knowledge Spillovers: The way that a geographically concentrated industry helps
foster knowledge spillovers, the industries can also try to learn from competitors by
studying their products and, in some cases, by taking apart to “reserve engineer”
their design and manufacture. An example of this is a given company's innovation
may stimulate a flood of related inventions and technical improvements by other
companies

5. Give key insights on the lower costs embedded in economies of scale.

• Readily available and fit labor
• Difference in technology
• Historical contingency

6. Explain the concept of “historical contingency” and provide three (3) clear examples.
Historical contingency it's when something gives a particular location an initial advantage in a particular
industry, and this advantage gets “locked in” by external economies of scale even after the
circumstances that created the initial advantage are no longer relevant, it means once a country has
established an advantage in an industry, it may retain that advantage even if some other country could
potentially produce the goods more cheaply.
• The financial center in London; London became Europe’s dominant financial center in the 19th
century, when Britain was the world’s leading economy and the center of a world-spanning
empire. It has retained that role even though the empire is long gone, and modern Britain is
only a middle-sized economic power.
• The financial center in New York, this one became America’s financial center thanks to the
Erie Canal, which made it the nation’s leading port. It has retained that role even though the
canal currently is used mainly by recreational boats.
• The Qiaotou fastener industry fits the classic pattern of geographical concentration driven by
external economies of scale. The industry’s origins lie in historical accidents: In 1980 three
brothers spotted some discarded buttons in the street, retrieved and sold them, then realized
there was money to be made in the button business.

7. Why is it important to consider sequential entry to a market for two countries which exhibit
external economies of scale?
It is important because of that it allows the country to free up resources from a relatively less efficient
industry and expand production in industries with more efficient production and with increasing returns,
this expansion of production will drive down cost and improve balance of payment.
8. If two different countries trading in a same good enjoy external economies of scale in its
production, is it possible that trade is harmful to either of them? Why?
That it's possible because each country has their own economies of scale which means that also
includes different cost of production and prices, so due to that one of the countries could be receiving
less income than the other.

9. If two different countries trading in a same good enjoy internal economies of scale in its
production, is it possible that trade is harmful to either of them? Why?
It is not harmful to any of the countries, however, the magnitude of the benefit from trade is greater in
the small country than in the large country, due to increasing returns and product differentiation,
considering that there is no comparative advantage between them.

10. If two different countries trading in a same good enjoy external economies of scale in its
production, is it possible that trade under these circumstances is suboptimal for the world economy?
Why?
Yes, it is possible, since the case can happen in which a country has blocked the entry to the market of
a good that can be produced in another country at lower prices, this due to a lower average cost curve
and to the fact that the country that has the blocking has an initial advantage.

11. If two different countries trading in a same good enjoy external economies of scale in its
production, is it possible that trade under these circumstances is optimal for the world economy?
Why?
It depends, trade can be optimal for the world economy if the country that has the world market for
the good has an average cost curve lower than that of the other country, thus offering a greater
quantity of the good at lower costs.

12. Explain the “infant industry” argument for protectionism.

The infant industry argument establishes that through a subsidy the objective is to protect the industry
from foreign competition until it gains experience and can fend for itself in the international market.

13. Explain the concepts of dynamic increasing returns and learning curves.
Dynamic Increasing Returns:
When costs fall with cumulative production over time rather than with the current rate of production,
could arise if the cost of production depends on the accumulation of knowledge and experience.
Learning Curves: Relate unit cost to cumulative production.

14. Explain in detail how a world market partial equilibrium arises under perfect competition.
It occurs as in an ordinary analysis of supply and demand, when the demand curve crosses the average
cost, the latter has a negative slope and falls as the quantity produced increases.

15. How does a tariff on a good affect a home and a foreign country’s markets, if both are large
economies? Is there any difference if the home economy were small?

When the economies have the same size and one of them (home) applies a tariff on the good that is
imported, the prices in Home increase and those of Foreign decrease. In the case where Home is a
small country, imposing a tariff would only cause prices in Home to increase but could not cause
prices in Foreign to decrease.

16. Explain the concept of “rate of protection” and caveats linked to it.
It measures how much protection a tariff or other trade policy actually provides and it's expressed as a
percentage of the price that would prevail under free trade. However, there are two problems with
trying to calculate the rate of protection. First, if the small country assumption is not a good
approximation, part of the effect of a tariff will be to lower foreign export prices rather than to raise
domestic prices. This effect of trade policies on foreign export prices is sometimes significant. The
second problem is that tariffs may have very different effects on different stages of production of a
good.

17. Explain the concept of “effective rate of protection” and its importance.

RTA: The effective rate of protection (ERP) is a measure of the level of protection provided to a
domestic industry, taking into account both tariff and non-tariff barriers. It is the percentage increase
in value added that results from trade protection measures, such as tariffs or subsidies.

18. Explain the effect of imposing a tariff under perfect competition in terms of welfare gained or lost
in full detail.

RTA: Under perfect competition, imposing a tariff leads to a loss of overall welfare, known as
deadweight loss. The tariff causes a decrease in imports and an increase in domestic production,
which raises the price of the good for consumers. The increase in price reduces consumer surplus, and
the total loss of consumer surplus is greater than the gain in producer surplus, resulting in a net
welfare loss. Deadweight loss is the loss of welfare that results from the distortion in the market
caused by the tariff.
19. Explain the effect of enacting an export subsidy under perfect competition in terms of welfare
gained or lost in full detail.

RTA: Under perfect competition, enacting an export subsidy leads to a loss of overall welfare, known
as the deadweight loss. The subsidy causes an increase in domestic production and a decrease in the
price of the good for foreign consumers, which increases exports. However, the increased production
leads to a decrease in the price of the good in the domestic market, reducing producer surplus.
Additionally, the subsidy leads to an increase in government spending, which can lead to higher taxes
or reduced government spending on other programs, causing a welfare loss. The deadweight loss is
the loss of welfare that results from the distortion in the market caused by the subsidy.

20. Is enacting a subsidy or a voluntary export restraint a rational choice? Explain.

RTA: Enacting a subsidy or a voluntary export restraint may not always be a rational choice in the
long run. While they may provide temporary benefits to domestic producers, they can lead to negative
consequences, such as retaliation by trading partners or dependency on subsidies. In addition, they can
lead to inefficient resource allocation and distortions in the market, resulting in deadweight losses.
Instead, pursuing free and fair trade policies that promote competitiveness and innovation may be a
more rational choice in the long run.

21.

Is imposing a tariff or an import quota a rational choice? Explain.

According to the international trade yes, because it is a good way to get control over the imports and it
means a profit to the government.
For the tariffs we can see the main one that is the “ad valorem” this one is focused on charges as a
percentage of the goods, it can be measured by quantity or by value of the same good.
For the quotas the main one is the “absolute quota” in which the quantity of the products is limited
by the exporting country, this one creates the quota after making the deal with the importing country

22. How do import quotas work? Explain in full detail.

We can define the import quotas as limitation of quantity in exports, in question 21 (above this one).
Also, this import quota has some objectives, such as:
-Protect the domestic product creating this ¨barrier¨ with the market of the foreign country.
-It helps to reduce the deficit in the payment balance of our country.
-Fighting the trade policies of foreign countries.
-Adjusting the adverse of the market (focused on prices, quantities, etc.)

23. A government is planning to impose either a tariff or an import quota. Which option is better in
terms of government revenue? In terms of social welfare?
For the government the best option is choose the tariff, since it represents more revenue due to the
types of tariffs, they can take $100 for the tariff of import a car or 5% of import a ton of rice, this one
is more focused in the revenue, it also works to protect the domestic industry but the main objective is
raise revenues.
In terms of social welfare, it depends on the way we look it, in both options it works to protect the
domestic industry, but in each case the consumers will be affected for one reason, the prices of the
goods will increase due to the tariff/quota, but if we check this as producers the quota is a better
option, because it works focused on protect the local production, this means that we as consumers will
consume more the national goods since they are cheaper, the tariff should works the same way, but
since they could impact with a lower price to the imported products the people could demand it more
because the price shouldn´t increase in the same way with tariffs, so it depends on the way we look at
the market, if we want to protect the local production or if we are the consumers/producers.
24. How do voluntary export restraints work? Explain in full detail.
The Voluntary Export Restraint (VER) is a variant of the import quota, in this case the quota of
import is imposed by the local country, not by the foreign one (the export country is the one who
¨creates this quota, not the importing country). It works the same as an import quota, the foreign
governments control the licenses, and this is the reason it is costly to the importing country.

25. How do local content requirements work? Explain in full detail.

is a regulation that requires some specified fraction of a final good to be produced domestically.
In cases the requirement is stated in value terms, by requiring that some minimum share of the price
of a good represent domestic value added. From the point of view of the domestic producers of parts,
a local content regulation provides protection in the same way an import quota does. Local
contentdoes not place a strict limit on imports. Instead, it allows firms to import more, provided that
they also buy more domestically. This means that the effective price of inputs to the firm is an average
of the price of imported and domestically produced inputs.

26. Are there any other policy instruments other than tariffs, quotas, subsidies, or export restraints? If
so, list them and explain how they work in detail.
• Export credits subsidies: This is like an export subsidy except that it takes the form of a
subsidized loan to the buyer. ~ The United States, like most other countries,has a government
institution, the Export-Import Bank, that is devoted to providing at east slightly subsidized
loans to aid exports.
• National procurement. Purchases by the government or strongly regulated firms can be
directed toward domestically produced goods even when these goods are more expensive than
imports ~The classic example is the European telecommunications industry. The nations of
the European Union in principle have free trade with each other. The main purchasers of
telecommunications equipment, however, are phonecompanies—and in Europe, these
companies have until recently all been governmentowned. These government-owned
telephone companies buy from domestic suppliers even when the suppliers charge higher
prices than suppliers in other countries. The result is that there is very little trade in
telecommunications equipment within Europe.
• Red-tape barriers. Sometimes a government wants to restrict imports without doing so
formally. Fortunately or unfortunately, it is easy to twist normal health, safety, and customs
procedures in order to place substantial obstacles in the way of trade .~ The classic example is
the French decree in 1982 that all Japanese videocassette recorders had to pass through the
tiny customs house at Poitiers—effectively limiting the actual imports to a handful. ~

27. Russian nationals and firms have been sanctioned as a consequences of the ongoing Russo-
Ukrainian war. Where do these measures fit within trade policy instruments? Explain in detail.
can be seen as a non-tariff trade barrier, which is a type of trade policy instrument used by
governments to restrict or regulate imports or exports. In the case of the Russo-Ukrainian war, the
sanctions against Russian nationals and firms are aimed at pressing the Russian government to change
its behavior, including its annexation of Crimea and support for separatist rebels in eastern Ukraine.
The sanctions are designed to limit the ability of these individuals and companies to do business with
other countries, which can have a significant impact on their economic activity.

28. How do economies of scale relate to an argument in favor of free trade?

The benefits of economies of scale will ultimately lead to lower prices for consumers and greater
efficiency for exporting firms. With more trade, domestic firms will face more competition from
abroad. Therefore, there will be more incentives to cut costs and increase efficiency.

29. Are there any political arguments in favor of free trade? If so, explain them in detail.
Yes, there is a formal argument for the efficiency gains of free trade that it is simply the cost-benefit
analysis of the absence of trade policy. Second, free trade produces additional gains that go beyond
this formal analysis. Finally, they see it as a useful rule of thumb in free trade

30. Explain the terms of trade argument for imposing a tariff, along with the concept of optimal
tariffs.

the argument is that a tariff reduces the price of imports and therefore generates a profit in the
exchange relationship. This benefit must be compared with the costs of the fee, which they arise
because the tariff distorts the incentives for production and consumption. It's possible, however, that
in some cases the terms-of-trade effect of a tariff outweigh its costs, so there is the terms-of-trade
argument in favor of a tariff.

31. Does the producer surplus always represent benefits adequately? Explain in detail.

no, because the work used in a sector would be misused or unemployed; the existence of deficiencies
in the capital or labor markets, which prevent resources from being transferred as fast as they should
into high-profit sectors; and the possibility of technological externalities of new or particularly
innovative industries.

32. Explain the Second-best Theory for conducting active trade policy.

The second best theory refers to a situation in which it is not possible to reach a social optimum due to
the existence of other distortions or failures in the market. In the context of trade policy, second best
theory suggests that, in certain circumstances, active trade policy can improve economic welfare in
the sense that it can reduce distortions in the market.

33. Explain the links between electoral contests and trade policy.

We can trace clear links with tools that politicians use to gain voters, they aim to gain the median
voter, this voter is at the halfway of the line of political support. This tool could be useful to
understand how people vote for a selected tariff, that could be set by seeking the median voter desire
rate. Nevertheless, this tool is contradictory in the case of protectionist policies. In a normal situation
the median voter tool will chose the biggest benefits even if its represents a small loss to a some
people, but on a protectionist policy this situation will be inverted so a small group will be benefit and
a larger one will have a small lose.

34. What are the political economy consequences of enacting a subsidy at Home and Abroad?

On this case we need to focus our analysis on the total welfare of both economies. We can select
three main agents, producers, and the government. The benefits of the producers should rise due to
the higher prices the import product have. The consumer’s benefit is going to be lower because the
lack of competitiveness on the market. Finally the government lowers its benefit because they need
to gave money away for the subsidies.

35. Explain the concept of political activity as a public good and how it relates to trade policy. Does
collective action face any problems in this regard?

Political activity can be considered as a public good since this activity not only benefits the one who
performs it but also a larger group can take an advantage of this. It can be related to trade policy when
an individual for example, is interest in lower the tariff rate of one of his or her favorite imported
good, so this individual pass a law that effectively reduces the tariff and now he can enjoy lower
prices as well as other consumers that didn’t bother to pass a law that lowers the tariff.
The problem on collective action is that there´s a small well-organized group and a big unaware
group. The small group has the capacity to influence on the political activity and take advantage of the
passiveness of the large group.

36. How do protected sectors relate to the definition of national trade policies? Give three clear and
concise examples.

Protected sectors are directly related to protectionist policies which can refer to instruments such as
tariffs, import quotas or government subsidies. In the case of tariffs, this could apply for example to
clothes in Colombia some imported clothes have a 40% increase. In the case of import quotas China
has a quota on Cambodian rice exports of 300000 tons per year. On government subsidies, the US
subsidies certain crops such as wheat or cotton.

37. What are bilateral negotiation spillovers? Explain and give an example of them.

The indirect effects of bilateral negotiations refer to the impacts that the conclusion of a trade
agreement between two countries may have on third countries that are not part of the agreement.
These effects can be positive or negative and can affect production, trade and prices in these third
countries.

An example of a positive spillover effect of bilateral negotiation could be the case where two
neighboring countries decide to remove tariffs and other trade barriers between them. If one of the
countries produces a good that is also imported from another neighboring country, lower production
costs and prices of the good in the first country may lead to increased demand for that good, which in
turn may lead to for the importing country to reduce its imports of that good from the third country
that is not part of the agreement.

38. Provide key insights on GATT (General Agreement on Tariffs and Trade) and its caveats.

The GATT was a landmark agreement that helped reduce tariff and non-tariff barriers to international
trade.

The GATT most-favoured-nation clause establishes that any tariff benefit granted by one country to
another must be extended to all other member countries, without discrimination.

The GATT was one of the main reasons for economic growth in the period after World War II.

39. Explain the concept of Most Favored Nation.

Most-Favoured-Nation is a fundamental principle in the international trading system that requires

countries to grant the same trade advantages to all their trading partners, without discrimination. This
principle encourages fair competition and helps prevent trade protectionism and trade wars.

40. Does it make sense to engage in a trade war under WTO (World Trade Organization) trading
rules? Explain.
there is no point in engaging in a trade war under the trade rules of the WTO, as you are likely to
violate trade rules and face negative consequences. Instead, countries should seek to resolve trade
disputes constructively and follow the principles of free trade and international cooperation.

41. Are there any current cases of GATT/GATS(General Agreement on Trade in Services)/WTO
violation of rules through loopholes? Explain.
Loopholes are used by countries to gain unfair trade advantages. For example, currently in the case of
Colombia the government (ministry of agriculture) offers subsidies to rice growers, which allows
them to sell their products at lower prices than those of foreigners. This practice is considered a form
of dumping and is prohibited by WTO rules.
42. Define and differentiate customs unions and free trade areas (FTAs).
Customs unions and free trade areas (FTAs) are types of trade agreements to promote trade between
countries.
A customs union is a group of countries that agree to remove trade barriers, such as tariffs and
quotas, between them and to adopt a common external tariff (CET) on goods imported from non-
member countries. A clear example is the European Union. There is a problem, and they are the
restrictions on the independent negotiation of a country belonging to the customs union with a country
that is not part of it.
A free trade area (FTA) is a group of countries that agree to remove trade barriers, such as tariffs
and quotas, between themselves but maintain their own independent trade policies towards non-
member countries. In an FTA, members can negotiate trade agreements with non-members
independently. For example, NAFTA (North American Free Trade Agreement) and ASEAN
(Association of Southeast Asian Nations)
43. If a country singlehandedly levies a tariff on another country’s good while belonging to an FTA,
do all remaining members have to do it too? Explain.
If a member country of an FTA unilaterally imposes a tariff on a good imported from another
member, this may violate THE FTA rules. Other members can file a complaint and request a
resolution through a panel of experts. If the violation is confirmed, the WTO can authorize retaliatory
measures against the offending country, but nonetheless all members must impose countervailing
duties in response.
44. If a country like Croatia enters the EU Customs Union, can it unilaterally enact an agricultural
subsidy? Explain.
When a country enters the EU Customs Union, it agrees to comply with EU rules and regulations on
trade. If Croatia were to become a member of the Customs Union, it would not be able to unilaterally
enact an agricultural subsidy that violates EU rules and regulations. The EU has clear rules on
agricultural subsidies, and EU members are bound by these rules and cannot take unilateral action that
violates them.
45. Explain the main blocks that make up the Balance of Payments (BoP) and what they account for.
The Balance of Payments is a systematic record of all economic transactions between the residents of
a country and the rest of the world during a given period. This is made up of three main
blocks:
1. Current account: This account records transactions of goods and services, income, and current
transfers between the country and the rest of the world.
• The trade balance: record of exports and imports of goods.
• The balance of services: registration of transactions related to services, such as tourism,
transportation, financial services, among others.
• The income balance: record of income and payments associated with productive factors, such
as work and capital, that the country has abroad.
• The balance of current transfers: registration of transactions that are neither commercial nor
income, such as remittances and donations.
 2. Capital account: This account records long-term capital transactions between the country and
the rest of the world.
• Direct investment: registration of investment abroad and investment received from other
countries.
• Portfolio investment: registration of investments in stocks, bonds and other securities.
• Other Investments: Record of long-term financial transactions, such as loans and deposits.
3.Financial account: This account records short-term financial transactions between the country and
the rest of the world.

• The Financial Assets Account: A record of the acquisition or sale of financial assets abroad,
such as stocks and bonds.
• The Financial Liabilities Account: A record of the issuance or redemption of financial
liabilities, such as loans and bonds.
In short, the Balance of Payments is an accounting record that shows how a country interacts
economically with the rest of the world. The current account and the capital account show
long-term transactions, while the financial account shows short-term transactions.

46. Why is it important for a country’s Central Bank to keep a positive or non-changing Balance of
Payments?
It is important for the Central Bank of a country to maintain a positive or balanced Balance of
Payments because it indicates that the country is exporting more goods and services than it is
importing. This means that the country is generating more foreign currency income than it is
spending, which can have various economic benefits, such as:
1. Strengthening of the national currency: If a country has a positive Balance of Payments, it means
that there is a greater demand for its currency, which can lead to its appreciation in international
markets.
2. External debt reduction: A positive Balance of Payments also means that a country is receiving
more foreign currency income than it is spending, which can help reduce its external debt.
3. Economic stability: A positive Balance of Payments can also be an indicator of the economic
stability of a country. If a country is exporting more goods and services than it is importing, this may
indicate that it has a strong and competitive economy.
4. Improvement of investment: If a country has a positive Balance of Payments, it can attract more
foreign investment due to its economic stability and strength in the international market.
However, it is important to note that a positive Balance of Payments is not always the ultimate goal
for a country. In some cases, a surplus of exports can lead to an excessive appreciation of the currency
and a loss of competitiveness in international markets, so it is important that central banks closely
monitor the evolution of the Balance of Payments and take appropriate measures. to maintain a
balanced and sustainable economic situation in the long term.

47. Is a current account deficit something necessarily negative? Explain

A current account deficit is when a country imports more than it exports, and it is not always
necessarily negative.
If a country is importing goods and services that are necessary for its economic growth, such as
technological equipment, the current account deficit can be seen as a positive factor. Additionally, a
current account deficit can stimulate a country's economic activity, as imports of foreign goods and
services can create employment opportunities, increase access to diverse products and stimulate
domestic competition.
However, a persistent current account deficit can also have negative effects. It can lead to an increase
in foreign debt, which can affect a country's credit rating and harm its economic stability.
Additionally, it can lead to a decrease in domestic production, as businesses may find it cheaper to
import goods rather than produce them domestically. If left unchecked, a current account deficit can
lead to a decline in a country's currency value, which can have adverse economic consequences.
Overall, whether a current account deficit is negative or not depends on the circumstances and the
overall situation of the country in question.

48. Is a financial account deficit something necessarily negative? Explain

A financial account deficit refers to a situation where a country's inflow of capital is less than its
outflow of capital. While a financial account deficit is not necessarily negative, it can have significant
impacts on a country's economy.
In some cases, a financial account deficit can be a positive indicator, indicating that a country is
attracting foreign investment. This can lead to increased economic activity and growth, as foreign
investors bring in capital, knowledge, and technical expertise. Additionally, a financial account deficit
can help fund government expenditures, such as infrastructure projects, that can stimulate economic
growth.
However, a persistent financial account deficit can have negative effects. If foreign investors begin to
withdraw their capital, it can lead to a currency crisis, causing a rapid depreciation of the country's
currency value.Additionally, a financial account deficit can lead to an increase in foreign debt, which
can harm a country's credit rating and lead to austerity measures.
Overall, whether a financial account deficit is negative or not depends on the circumstances and the
overall economic situation of the country in question.