International Trade - Theory and Policy, 2010a

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tariffs or other government regulations are imposed within the context of a Heckscher-Ohlin (H-O) model. Due to the assumption of perfect competition in all markets, if production occurs in an industry, then economic profit is driven to zero. The zero-profit conditions in each industry imply PS = aLS w + aKS r and PC = aLC w + aKC r, where PS and PC are the prices of steel and clothing, respectively; w is the wage paid to labor, and r is the rental rate on capital. Note that aLSw[labor−hrston$labor−hr=$ton] is the dollar payment to workers per ton of steel produced, while aKSr[capital−hrston$capital−hr=$ton] is the dollar payment to capital owners per ton of steel produced. The right-hand-side sum then is the dollars paid to all factors per ton of steel produced. If the payments to factors for each ton produced equal the price per ton, then profit must be zero in the industry. The same logic is used to justify the zero-profit condition in the clothing industry. We imagine that firms treat prices exogenously since any one firm is too small to affect the price in its market. Because the factor output ratios are also fixed, wages and rentals remain as the two unknowns. In Figure 5.4 "Zero Profit Lines in Clothing and Steel", we plot the two zero-profit conditions in wage-rental space. Figure 5.4 Zero Profit Lines in Clothing and Steel The set of all wage and rental rates that will generate zero profit in the steel industry at the price PS is given by the flatter blue line. At wage and rental combinations above the line, as at points A and D, the Saylor URL: http://www.saylor.org/books Saylor.org 203
per-unit cost of production would exceed the price, and profit would be negative. At wage-rental combinations below the line, as at points Band C, the per-unit cost of production would fall short of the price, and profit would be positive. Notice that the slope of the flatter blue line is −PS/aKSPS/aLS=−aLSaKS. Similarly, the set of all wage-rental rate combinations that will generate zero profit in the clothing industry at price PC is given by the steeper red line. All wage-rental combinations above the line, as at points B and D, generate negative profit, while wage-rental combinations below the line, as at A and C, generate positive profit. The slope of the steeper red line is −PC/aKCPC/aLC=−aLCaKC. The only wage-rental combination that can simultaneously support zero profit in both industries is found at the intersection of the two zero-profit lines—point E. This point represents the equilibrium wage and rental rates that would arise in an H-O model when the price of steel is PS and the price of clothing is PC. Now, suppose there is an increase in the price of one of the goods. Say the price of steel, PS, rises. This could occur if a country moves from autarky to free trade or if a tariff is placed on imports of steel. The price increase will cause an outward parallel shift in the blue zero-profit line for steel, as shown in Figure 5.5 "Graphical Depiction of Stolper-Samuelson Theorem". The equilibrium point will shift from E to F, causing an increase in the equilibrium rental rate from r1 to r2 and a decrease in the equilibrium wage rate from w1 to w2. Only with a higher rental rate and a lower wage can zero profit be maintained in both industries at the new set of prices. Using the slopes of the zero-profit lines, we can show that aLCaKC>aLSaKS, which means that clothing is labor intensive and steel is capital intensive. Thus, when the price of steel rises, the payment to the factor used intensively in steel production (capital) rises, while the payment to the other factor (labor) falls. Figure 5.5 Graphical Depiction of Stolper-Samuelson Theorem Saylor URL: http://www.saylor.org/books Saylor.org 204
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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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United States L C + L W = L France
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2. Suppose that the unit labor requ
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KEY TAKEAWAYS The equation aLC QC
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comparative advantage in newspaper
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−aLCaLW⎡⎣⎢hrslbhrsgal=gallb
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KEY TAKEAWAYS Labor productivity i
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2.6 A Ricardian Numerical Example L
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With full employment of labor, prod
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At this point, we can already see a
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The answer to some of these questio
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wC=PCaLC. If production occurs in t
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Thus a good way to think about how
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Similarly, by rearranging the above
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production. But where will they fin
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The focus on real wages allows us t
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Real Wages in Autarky To calculate
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exchange. Thus the real wage of che
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2.11 The Welfare Effects of Free Tr
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Free trade will raise aggregate wel
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Chapter 3 The Pure Exchange Model o
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A Simple Example of Trade Suppose t
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3.2 Determinants of the Terms of Tr
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Persuasion The art of persuasion ca
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KEY TAKEAWAY The terms of trade is
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two individuals make a voluntary ex
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3.4 Three Traders and Redistributio
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is not motivated by profit but inst
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The changes described above assume
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3.6 The Nondiscrimination Argument
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clothing worker. The same applies i
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the page, scroll down to the “Bou
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4.1 Factor Mobility Overview LEARNI
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argument that free trade can only b
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them, but only if the prices are ve
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4.3 Time and Factor Mobility LEARNI
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Page 162 and 163: In autarky, the quantity demanded o
Page 164 and 165: 4.7 Depicting a Free Trade Equilibr
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Page 168 and 169: Thus cheese workers are most likely
Page 170 and 171: Real Wage of Wheat Workers in Terms
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Page 174 and 175: EXERCISE 1. Jeopardy Questions. As
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Page 182 and 183: would rise, while the wage rate wou
Page 184 and 185: Ricardian model, then factor prices
Page 186 and 187: 4. This is by which industries diff
Page 188 and 189: where KC and KS are the quantities
Page 190 and 191: Let aLC[labor−hrsrack] represent
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Page 196 and 197: The Relationship between Endowments
Page 198 and 199: Suppose the exogenous variables of
Page 200 and 201: Adding these two equations vertical
Page 202 and 203: 3. Write the magnification effect f
Page 206 and 207: If the price of clothing had risen,
Page 208 and 209: Table 5.6 Numerical Values for Exog
Page 210 and 211: w∧>PC∧>PS∧>r∧. The effect i
Page 212 and 213: 2. Suppose the price of cheese fall
Page 214 and 215: this requires a fair amount of adva
Page 216 and 217: workers per unit of capital in the
Page 218 and 219: of quantities CS″/CC″. Since CS
Page 220 and 221: In Figure 5.8 "Free Trade Equilibri
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Page 226 and 227: who has deposits in a pension plan
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Page 230 and 231: Income is redistributed among indiv
Page 232 and 233: Thus it is always possible to find
Page 234 and 235: affects the capital-labor ratios in
Page 236 and 237: 1. Describe the pattern of factor f
Page 238 and 239: assumed to be freely and costlessly
Page 240 and 241: expansion of output in the export s
Page 242 and 243: [1] See R. W. Jones, “A Three-Fac
Page 244 and 245: product line for a representative t
Page 246 and 247: The total amount of revenue earned
Page 248 and 249: The horizontal length of Figure 5.1
Page 250 and 251: Our prime concern, however, is the
Page 252 and 253: 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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