International Trade - Theory and Policy, 2010a

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3.4 Three Traders and Redistribution with Trade LEARNING OBJECTIVES 1. Learn how changes in the numbers of traders changes the terms of trade and affects the final consumption possibilities. 2. Learn that an increase in competition causes a redistribution of income. 3. Learn the importance of the profit-seeking assumption to the outcome. 4. Learn how one’s role as a seller or buyer in a market, affects one’s preference for competition. Suppose for many days, months, or years, Farmer Smith and Farmer Jones are the only participants in the market. However, to illustrate the potential for winners and losers from trade, let us extend the pure exchange model to include three farmers rather than two. Suppose that one day a third farmer arrives at the market where Farmer Jones and Farmer Smith conduct their trade. The third farmer is Farmer Kim, and he arrives at the market with an endowment of ten apples. The main effect of Farmer Kim’s arrival is to change the relative scarcity of apples to oranges. On this day, the total number of apples available for sale has risen from ten to twenty. Thus apples are relatively more abundant, while oranges are relatively scarcer. The change in relative scarcities will undoubtedly affect the terms of trade that is decided on during this second day of trading. Farmer Smith, as a seller of oranges (the relatively scarcer good), now has a stronger negotiating position than he had on the previous day. Farmer Jones and Farmer Kim, as sellers of apples, are now competing against each other. With the increased supply of apples at the market, the price of apples in exchange for oranges can be expected to fall. Likewise, the price of oranges in exchange for apples is likely to rise. This means that Farmer Smith can negotiate exchanges that yield more apples for each orange compared with the previous day. Suppose Farmer Smith negotiates a trade of three oranges for six apples with each of the two apple sellers (see Figure 3.2 "Three-Farmer Trade Pattern"). After trade, Farmer Smith will have twelve apples and four Saylor URL: http://www.saylor.org/books Saylor.org 133
oranges for consumption. Farmers Jones and Kim will each have three oranges and four apples to consume. Figure 3.2 Three-Farmer Trade Pattern As before, assuming that all three farmers entered into these trades voluntarily, it must hold that each one is better off than he would be in the absence of trade. However, we can also compare the fate of each farmer relative to the previous week. Farmer Smith is a clear winner. He can now consume twice as many apples and the same number of oranges as in the previous week. Farmer Jones, on the other hand, loses due to the arrival of Farmer Kim. He now consumes fewer oranges and the same number of apples as in the previous week. As for Farmer Kim, presumably he made no earlier trades. Since he was free to engage in trade during the second week, and he agreed to do so, he must be better off. It is worth noting that we assume here that each of the farmers, but especially Farmer Smith, is motivated by profit. Farmer Smith uses his bargaining ability because he knows that by doing so he can get a better deal and, ultimately, more goods to consume. Suppose for a moment, however, that Farmer Smith Saylor URL: http://www.saylor.org/books Saylor.org 134
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This text was adapted by The Saylor
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Chapter 1 Introductory Trade Issues
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However, rapid growth in the value
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As of 2009, 153 countries were memb
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International trade is a field in e
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imported, the U.S. government colle
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Kenya 12.7 Ghana 13.1 Generally spe
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Average tariffs can be measured as
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When the bubble bursts, the demand
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missed deadlines are commonplace in
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a well-known “bicycle theory” a
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But at the same time that many deve
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Recent opposition to trade liberali
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ought back to the United States and
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conference attended by the main all
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One of the key principles of the GA
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arriers. [1] The trade remedy laws
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ound tariff rate the country reache
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instead, they are put into place ov
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5. The WTO principle to treat an im
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subsidies. Recall that export subsi
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As a result of Uruguay Round negoti
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Agreement, or TRIPS. The TRIPS inte
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1.7 The World Trade Organization LE
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1. Consultations. The DSB first dem
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countries from choosing more destru
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P, P+ CAFTA-DR FTA PE MA OM R SG U.
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0806.10.20 $1.13/m 3 (Feb. 15-Mar.
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Tariffs vary according to time of e
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1.9 Appendix B: Bound versus Applie
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EXERCISE 1. Jeopardy Questions. As
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2.1 The Reasons for Trade LEARNING
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For example, the Ricardian model of
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2. Learn the major historical figur
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could end up with more of both good
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The primary issue in the analysis o
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Real wages (and incomes) of individ
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he begins planting seeds in the sec
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In this way, we might raise the wel
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2.3 Ricardian Model Assumptions LEA
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Utility Maximization and Demand In
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Page 86 and 87: 2. Suppose that the unit labor requ
Page 88 and 89: KEY TAKEAWAYS The equation aLC QC
Page 90 and 91: comparative advantage in newspaper
Page 92 and 93: −aLCaLW⎡⎣⎢hrslbhrsgal=gallb
Page 94 and 95: KEY TAKEAWAYS Labor productivity i
Page 96 and 97: 2.6 A Ricardian Numerical Example L
Page 98 and 99: With full employment of labor, prod
Page 100 and 101: At this point, we can already see a
Page 102 and 103: The answer to some of these questio
Page 104 and 105: wC=PCaLC. If production occurs in t
Page 106 and 107: Thus a good way to think about how
Page 108 and 109: Similarly, by rearranging the above
Page 110 and 111: production. But where will they fin
Page 112 and 113: The focus on real wages allows us t
Page 114 and 115: Real Wages in Autarky To calculate
Page 116 and 117: exchange. Thus the real wage of che
Page 118 and 119: 2.11 The Welfare Effects of Free Tr
Page 120 and 121: Free trade will raise aggregate wel
Page 122 and 123: Chapter 3 The Pure Exchange Model o
Page 124 and 125: A Simple Example of Trade Suppose t
Page 126 and 127: 3.2 Determinants of the Terms of Tr
Page 128 and 129: Persuasion The art of persuasion ca
Page 130 and 131: KEY TAKEAWAY The terms of trade is
Page 132 and 133: two individuals make a voluntary ex
Page 136 and 137: is not motivated by profit but inst
Page 138 and 139: The changes described above assume
Page 140 and 141: 3.6 The Nondiscrimination Argument
Page 142 and 143: clothing worker. The same applies i
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Page 146 and 147: 4.1 Factor Mobility Overview LEARNI
Page 148 and 149: argument that free trade can only b
Page 150 and 151: them, but only if the prices are ve
Page 152 and 153: 4.3 Time and Factor Mobility LEARNI
Page 154 and 155: EXERCISE 1. Jeopardy Questions. As
Page 156 and 157: factor to be moved and become produ
Page 158 and 159: KEY TAKEAWAY The immobile factor m
Page 160 and 161: wine workers and cheese workers. Th
Page 162 and 163: In autarky, the quantity demanded o
Page 164 and 165: 4.7 Depicting a Free Trade Equilibr
Page 166 and 167: 0 the variable does not change A th
Page 168 and 169: Thus cheese workers are most likely
Page 170 and 171: Real Wage of Wheat Workers in Terms
Page 172 and 173: wages. However, these extra profits
Page 174 and 175: EXERCISE 1. Jeopardy Questions. As
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Page 178 and 179: 5.1 Chapter Overview LEARNING OBJEC
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Page 182 and 183: would rise, while the wage rate wou
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Ricardian model, then factor prices
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4. This is by which industries diff
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where KC and KS are the quantities
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Let aLC[labor−hrsrack] represent
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The capital-labor ratio in an indus
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that would employ all the capital i
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The Relationship between Endowments
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Suppose the exogenous variables of
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Adding these two equations vertical
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3. Write the magnification effect f
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tariffs or other government regulat
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If the price of clothing had risen,
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Table 5.6 Numerical Values for Exog
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w∧>PC∧>PS∧>r∧. The effect i
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2. Suppose the price of cheese fall
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this requires a fair amount of adva
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workers per unit of capital in the
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of quantities CS″/CC″. Since CS
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In Figure 5.8 "Free Trade Equilibri
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5.11 National Welfare Effects of Fr
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calculating changes in real income
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who has deposits in a pension plan
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export industry in order to benefit
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Income is redistributed among indiv
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Thus it is always possible to find
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affects the capital-labor ratios in
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1. Describe the pattern of factor f
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assumed to be freely and costlessly
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expansion of output in the export s
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[1] See R. W. Jones, “A Three-Fac
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product line for a representative t
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The total amount of revenue earned
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The horizontal length of Figure 5.1
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Our prime concern, however, is the
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An alternative version of the magni
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8. The magnification effect for pri
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can be used to transport tomatoes o
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esponds to the excess supply of wor
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The effect on workers is, in genera
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Factor Rewards over Time Now let’
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Figure 5.20 Dynamic Import-Capital
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In summary, the models suggest that
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[1] See J. P. Neary, “Short-Run C
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6.1 Chapter Overview LEARNING OBJEC
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6.2 Economies of Scale and Returns
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produced and if the costs of this e
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6.3 Gains from Trade with Economies
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United States aLC = 1 L = 100 Franc
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thirty racks of clothing, then each
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model best describes markets in whi
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2. Each firm produces a product tha
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2. The demand assumption in which e
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Keep in mind that this is the equil
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KEY TAKEAWAYS A market equilibrium
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1. If the product is such that an i
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varieties may increase aggregate we
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7.1 Basic Assumptions of the Partia
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2. The term used to describe a coun
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where XSUS(.) is the export supply
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This implies also that world supply
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1. The price that equalizes one cou
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The price that ultimately prevails
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Surplus", some firm would be willin
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Changes in Producer Surplus Suppose
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2. The term used to describe a meas
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the same price for their product re
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to purchase the Mexican wheat at $1
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The effect on the foreign price is
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The quantity of imports and exports
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the sum of the gains exceeds the su
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indicate the effect of each policy
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7.6 The Optimal Tariff LEARNING OBJ
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zero. Somewhere between a zero tari
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3. The tariff rate that corresponds
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KEY TAKEAWAYS An import tariff wil
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7.8 Import Tariffs: Small Country W
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3. The tariff causes a redistributi
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1. Where on the graph is the level
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We examine the effects of optimal t
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3. Given player one’s optimal pol
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The goal of a cooperative equilibri
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1. Use the information provided in
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7.10 Import Quotas: Large Country P
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An import quota will reduce the qua
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KEY TAKEAWAYS To administer a quot
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demand is equal to the quota level.
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market decreases producer surplus i
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Foreign National Welfare 2. Suppose
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This implies that, in the case of a
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Quota Rents National Welfare + C
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Import Quota (Administered by Givin
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to as tariffication. In this way, f
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Next, consider the effects in this
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In situations where market changes
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where S is the specific export subs
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7.17 Export Subsidies: Large Countr
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the subsidy payments are made, then
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An export subsidy of any size will
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2. Identify the effects of a counte
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Table 7.12 "Welfare Effects of the
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Consumer Surplus − (G + H + I + J
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KEY TAKEAWAYS An antisubsidy law,
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9. What is the change in government
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Notice that a unique set of prices
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in the import country and in the ca
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Figure 7.36 Welfare Effects of a VE
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the quota rents will benefit, but p
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A the variable change is ambiguous
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Mexico, and all wheat sold in Mexic
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7.23 Export Taxes: Large Country We
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Because there are both positive and
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− the variable decreases 0 the va
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8.1 Chapter Overview LEARNING OBJEC
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If a domestic consumption tax is im
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Equivalency between Domestic and Tr
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An import tariff applied on an impo
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KEY TAKEAWAYS Domestic production
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a Domestic Production Subsidy", whi
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Domestic policies can affect trade
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+ the variable increases − the va
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Domestic consumption taxes are ofte
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Figure 8.3 Inducing Exports with a
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8.7 Consumption Tax Effects in a Sm
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Since the cost to consumers exceeds
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When a specific consumption tax “
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time of the founding of the nation,
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Chapter 9 Trade Policies with Marke
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Market imperfections or market dist
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EXERCISE 1. Jeopardy Questions. As
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firm’s welfare) by restricting su
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are neatly kept and homes are well
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Policy-Imposed Distortions Another
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In this section, we will provide an
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Welfare-Improving Policies in a Sec
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Summary of the Theory of the Second
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9.4 Unemployment and Trade Policy L
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Suppose that international market c
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9.2 "Welfare Effects of an Import T
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Begin with the same surge of import
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eliminate the same unemployment imp
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A the variable change is ambiguous
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their own production efficiency imp
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Suppose that the infant industry ar
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This means that in the second perio
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The Economic Argument against Infan
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world efficiency standards, protect
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9.6 The Case of a Foreign Monopoly
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Assuming the monopolist maximizes p
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Import tariff effects on the import
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This shows that although a tariff c
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2. Recognize that a trade policy ca
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consider a large importing country
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the subsidy is set too high, the lo
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9.8 Public Goods and National Secur
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nonexcludable because once it is th
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efficiency loss. Nevertheless, the
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5. The term describing a ìgoodî l
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the environment. On the other hand,
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Pollution Effect National Welfare
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Govt. Revenue Pollution Effect + e
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A Source of Controversy For many en
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This statement points out that many
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noneconomists, providing permits th
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[4] World Trade Organization, “Tr
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product categories. This type of tr
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The key question of interest concer
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Figure 9.10 "Harmful Trade Diversio
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Free trade area effects on Country
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We assume that A has a specific tar
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The simple way to do that is to ima
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Chapter 10 Political Economy and In
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do indeed seek to maximize national
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a representative democracy, governm
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3. This type of lobbying does not i
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much larger than the number of firm
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We can now ask whether a household
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Large groups are much less effectiv
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Because the per-producer benefit of
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clearly he or she would vote for th
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10.7 The Lobbying Problem in a Demo
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Chapter 11 Evaluating the Controver
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the results from any one model. Ins
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increase in national welfare. This
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4. The enhancement of this is what
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of the real world. The real world c
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Another way to deflect the concern
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For example, an optimal tariff or o
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Stuart Mill in hisPrinciples of Pol
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11.5 The Economic Case against Sele
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to eliminate some of the inefficien
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effects, it would then need to meas
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to avoid the use of any such policy
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Selected protection requires detail
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11.6 Free Trade as the “Pragmatic
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