WK IV Journal: see attached | Economics

see attached WKIVJournal.docx This journal measures your mastery of ULOs 1.3, 3.1, 5.1, and 6.3. Journal objective: International trade can have significant effects on domestic markets. For use in the assignment, identify a good that the United States imports and a good the United States exports.  Length: Your submission is required to be at least 2-pages and not more than 5 pages in length, not including the title page and references. References: A minimum of 3 peer-reviewed references are required, any additional resources used are required to be scholarly/academic in nature and found in the CSU Library. APA formatting is required to be used for citations and references. Use this definition to define the term in the instructions.  Definitions: Scholarly journals are sometimes called academic journals. The terms are often used interchangeably to describe the same type of publication. These types of publications are published by universities, academic institutions, professional associations, and commercial enterprises and are compiled by scholars, academics, and other subject authorities. Details: In your paper, include the following: · Introduction · supply or demand for the particular good, · the competitiveness of that good’s market, and · how the change in competitiveness affects market structure as well as equilibrium price and quantity. · Stepping away from the import/export examples, describe how opening up to trade specifically affects a domestic monopoly. Include an explanation, using game theory, of how even a single additional competitor can lead to a market outcome similar to perfect competition. · Conclusion UnitIVStudyGuide.pdf ECO 6301, Economics for Managers 1 Course Learning Outcomes for Unit IV At the end of this unit, you should be able to: 5. Apply game theory to pricing and to output decisions in an oligopoly market. 5.1 Explain how game theory can lead to fierce competition even with only a few competitors in a market. 6. Analyze the basis of trade. 6.3 Describe how countries opening to international trade affect the market structure of domestic industries. Required Unit Resources Chapter 11: Foreign Exchange, Trade, and Bubbles (ULO 6.3) Chapter 15: Strategic Games (ULO 5.1) Chapter 16: Bargaining (ULO 5.1) Unit Lesson Lesson: International Trade and Strategic Behavior (ULOs 5.1, 6.3) This lesson will introduce you to the topics of international trade and strategic behavior that are the focus of this unit. Trade goes back to the dawn of civilization. As travel has become easier and more accessible, international trade has connected regions from across the globe. Unit I introduced the benefits of trade with the Starburst example. The same benefits hold when the exchange crosses international borders. In the Starburst example, the benefits of trade arose from differences in flavor preferences. Generally speaking, the benefits of trade arise from differences in opportunity costs. The opportunity costs are not about what we give up when we consume, but what we give up when we produce. That is, there are differences in production capabilities between people, regions, and countries. Iowa and Nebraska, for example are well equipped for producing corn. Colombia is well equipped for producing coffee. Countries with large populations and limited capital are well equipped for producing labor intensive goods. Countries with smaller populations but more capital are well equipped for producing capital intensive goods. If a Country Can Be Self-Sufficient, Should it Be? Even if a country can produce everything it needs, it is still better off trading due to differences in opportunity costs. Opportunity costs are the value of what you give up when making a choice. The United States might be able to produce bananas, but the resources required to produce enough bananas for the entire population could be used to produce other things. Producing enough bananas would take more land. Producing enough bananas would likely take more buildings and energy to create the proper tropical climate to grow bananas. This would all take resources away from producing corn or cars. The labor required to grow more bananas would also take labor away from software development or education. Growing bananas in the United States would mean giving up a lot of corn (or cars or software development or education), but producing corn (or cars or software or education) would not result in losing much banana production. UNIT IV STUDY GUIDE International Trade and Strategic Behavior ECO 6301, Economics for Managers 2 UNIT x STUDY GUIDE Title Having a lower opportunity cost to produce a certain good is called having a comparative advantage in that good. Basing production on comparative advantage leads to more overall production that can then be traded for other goods. In addition to benefiting from a lower opportunity cost, focusing production on specific goods also allows for specialization so producers get even better at producing their goods. By specializing, people get better at their tasks and also have time to develop new and better ways of producing. If people are trying to produce multiple things, they cannot put the same level of attention into improving specific processes. You might be familiar with the phrase “a jack of all trades, but a master of none.” That is what happens without specialization. Despite the benefits of trade, fear of international trade is common. There are concerns that jobs are lost to foreign competition. Certainly, there are specific jobs that will no longer be needed domestically. If the United States, for example, had been self-sufficiently producing bananas and then opened up to international trade and started importing bananas, jobs in the banana production market would no longer be needed. That does not mean, however, that overall jobs are lost to international trade. Jobs are gained from the ability to export goods. Jobs are also gained because the resources that were previously used to grow bananas can now be used to produce other goods. Also, the lower prices for bananas enable consumers to redirect their spending to other goods. Trade Protection What you might have picked up from the example of the bananas is that despite the benefits of trade, banana producers would still have a strong incentive to prevent competition from foreign banana producers. Banana producers then have an incentive to lobby the government for protection from foreign competition. This protection usually comes in the form of tariffs (there are other forms of trade protection, such as quotas, but tariffs are by far the most common). Tariffs are in the news a lot, particularly between China and the United States in 2019. Basic economic theory tells us that tariffs are simply passed on to consumers. This is not, however, what we necessarily see in practice. Elasticity is an important determinant in tax incidence (that is, who bears the burden of a tax). Tax incidence is determined by the relative elasticities between supply and demand. From a trade perspective, exchange rates can serve as a way for countries to absorb the tariff without having to raise their prices. China lets their currency depreciate to keep the prices of their products the same. When this happens, anybody holding Chinese currency essentially pays the tariff. Of course, that does not mean there are not costs to the United States from assessing tariffs. When China devalues their currency, U.S. produced goods become more expensive in China, so quantity demanded for U.S. exports goes down. Ultimately, both countries bear some of the burden from tariffs. So why assess tariffs? The most obvious reason is as described above: to help domestic interest groups. There can be other reasons, however, and to see that, we have to introduce some game theory. Game Theory Game theory is applied to decision-making where one party’s actions affect another party’s outcome. Game theory is not applicable to perfectly competitive markets because individual producers cannot affect the market outcome. Game theory is not applicable to monopoly because there is only one producer in a monopoly. Game theory is applicable to oligopolies where there are a handful of producers; so what one producer does affects the other producers. If Coke, for example, comes out with a new product, that new product will likely affect Pepsi and Dr Pepper. If Coke changes their price or embarks on a new marketing campaign, Pepsi and Dr Pepper will likely be affected. Pepsi and Dr Pepper, thus, need to decide how they will respond to Coke’s actions. Coke will also need to anticipate Pepsi and Dr Pepper’s response when deciding the action they take (you can think of it like the Battle of Wits from The Princess Bride). The optimal strategy for a “game” is determined by evaluating likely strategies by opponents and expected outcomes. Optimal strategies can also be affected by the structure of a game. Some games are sequential, where one player makes a decision and then the other player makes a decision in response to the first player’s decision. Other games are simultaneous where players make their decision at the same time. Ultimately, the outcome of a game is driven by the likely outcomes. ECO 6301, Economics for Managers 3 UNIT x STUDY GUIDE Title Game theory can also be applied to bargaining situations, for example, when bargaining over trade agreements. Trade agreements are often termed “free trade agreements,” but that is a bit of a misnomer. Certainly, most trade agreements eliminate tariffs, but if that is all that was involved, the agreement could be written on a cocktail napkin. Instead, trade agreements often include restrictions or allowances for subsidies, requirement wages, environmental rules, and rules of origin (rules of origin are requirements on the countries where intermediate goods in the production process were produced). All of these requirements can move the agreement away from free trade. This is where game theory and bargaining can play a role. Consider trade between the United States and China. China places considerable trade restrictions on imports from the United States, and the United States has historically not put many on imports from China. Now, per trade theory, this is still beneficial to the United States. That is, the United States still benefits from getting goods produced at a lower cost than companies in the United States could produce them. The United States would benefit even more, however, if China did not have trade restrictions. China, however, feels they benefit from their trade restrictions (standard economic theory would say they do not). So how does the United States get China to reduce their trade restrictions? One possible approach is to employ trade restrictions against Chinese products. This can be thought of as a game of chicken, except where the costs are steeper for China than for the United States. The risk, of course, for the United States, is that the costs are actually steeper for the United States. There are other factors that can matter for a negotiation as well. You might be familiar with the phrase, “Whoever gives a number first, loses.” That would suggest that being a first mover could put a bargainer at a disadvantage. This is because moving first reveals information to your opponent that they can use to decide the action. Credibility to commit to a position matters too. In a repeated game, if one party cannot credibly stick to their position through multiple iterations of a game, then the other party can benefit by simply waiting out the other party. In the case of the United States and China, the frequency of elections can be a handicap. The Chinese government will likely be in power for the foreseeable future, while any given United States administration only has certainty of four years at a time to be in power. Fortunately, you can see a lot of these concepts play out in the real world by paying attention to the news.