International Trade - Theory and Policy, 2010a

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who has deposits in a pension plan that invests in mutual funds has current wage income, but changes in rental rates will affect his or her future capital income. This person’s income stream thus depends on both the return to labor and the return to capital. For the moment, we shall consider the distributive effects on workers who depend solely on labor income and capitalists who depend solely on capital income. Later we shall consider what happens if individuals receive income from both sources. To measure gains or losses to workers and capitalists, we must evaluate the effects of free trade on their real incomes. Increases in nominal income are not sufficient to know whether an individual is better off since the price of exportable goods will also rise when a country moves to free trade. By assessing the change in real income, we can determine how the purchasing power of workers and capitalists is affected by the move to free trade. Suppose there are two countries, the United States and France, producing two goods, clothing and steel, using two factors, capital and labor, according to an H-O model. Suppose steel production is capital intensive and the United States is capital abundant. This implies that clothing production is labor intensive and France is labor abundant. If these two countries move from autarky to free trade, then, according to the H-O theorem, the United States will export steel to France and France will export clothing to the United States. Also, the price of each country’s export good will rise relative to each country’s import good. Thus in the United States, PS/PC rises, while in FrancePC/PS rises. Next, we apply the magnification effect for prices to each country’s price changes. In the United States, (PSPC)↑ => PS∧>PC∧—that is, if the ratio of prices rises, it must mean that the percentage change in PS is greater than the percentage change in PC. Then applying the magnification effect for prices implies This in turn implies that r∧>PS∧>PC∧>w∧. rPS↑, rPC↑, which means that the real rent in terms of both steel and clothing rises. And wPS↓, wPC↓, which means that the real wage in terms of both steel and clothing falls. Saylor URL: http://www.saylor.org/books Saylor.org 225
Thus individuals in the United States who receive income solely from capital are able to purchase more of each good in free trade relative to autarky. Capitalists are made absolutely better off from free trade. Individuals who receive wage income only are able to purchase less of each good in free trade relative to autarky. Workers are made absolutely worse off from free trade. In France, (PCPS)↑ => PC∧>PS∧—that is, the percentage change in PC is greater than the percentage change in PS. Then, according to the magnification effect for prices, w∧>PC∧>PS∧>r∧. This in turn implies that wPC↑, wPS↑, which means that the real wage in terms of both clothing and steel rises. And rPC↓, rPS↓, which means that the real rent in terms of both clothing and steel falls. Thus individuals in France who receive wage income only are able to purchase more of each good in free trade relative to autarky. Workers are made absolutely better off from free trade. Individuals in France who receive income solely from capital are able to purchase less of each good in free trade relative to autarky. Capitalists are made absolutely worse off from free trade. These results imply that both countries will experience a redistribution of income when moving from autarky to free trade. Some individuals will gain from trade, while others will lose. Distinguishing the winners and losers more generally can be done by referring to the fundamental basis for trade in the model. Trade occurs because of differences in endowments between countries. The United States is assumed to be capital abundant, and when free trade occurs, capitalists in the United States benefit. France is assumed to be labor abundant, and when free trade occurs, workers in France benefit. Thus, in the H-O model, a country’s relatively abundant factor gains from trade, while a country’s relatively scarce factor loses from trade. It is worth noting that the redistribution of income is between factors of production and not between industries. The H-O model assumes that workers and capital are homogenous and are costlessly mobile between industries. This implies that all workers in the economy receive the same wage and all capital receives the same rent. Thus if workers benefit from trade in the H-O model, it means that all workers in both industries benefit. In contrast to the immobile factor model, one need not be affiliated with the Saylor URL: http://www.saylor.org/books Saylor.org 226
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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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factor to be moved and become produ
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KEY TAKEAWAY The immobile factor m
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wine workers and cheese workers. Th
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In autarky, the quantity demanded o
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4.7 Depicting a Free Trade Equilibr
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0 the variable does not change A th
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Thus cheese workers are most likely
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Real Wage of Wheat Workers in Terms
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wages. However, these extra profits
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Page 176 and 177: French production and consumption i
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Page 180 and 181: less-developed countries have much
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
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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
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Page 218 and 219: of quantities CS″/CC″. Since CS
Page 220 and 221: In Figure 5.8 "Free Trade Equilibri
Page 222 and 223: 5.11 National Welfare Effects of Fr
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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
Page 254 and 255: 8. The magnification effect for pri
Page 256 and 257: can be used to transport tomatoes o
Page 258 and 259: esponds to the excess supply of wor
Page 260 and 261: The effect on workers is, in genera
Page 262 and 263: Factor Rewards over Time Now let’
Page 264 and 265: Figure 5.20 Dynamic Import-Capital
Page 266 and 267: In summary, the models suggest that
Page 268 and 269: [1] See J. P. Neary, “Short-Run C
Page 270 and 271: 6.1 Chapter Overview LEARNING OBJEC
Page 272 and 273: 6.2 Economies of Scale and Returns
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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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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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