International Trade - Theory and Policy, 2010a

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The horizontal length of Figure 5.14 "Specific Factor Model—Mussa Diagram", OTOS, represents the labor endowment (L), the total amount of labor available for use in the economy. The VMPT line slopes down from the left as presented before. However, theVMPS line slopes down from the right. This is because the point OS corresponds to zero units of labor used in steel production and OTOS units of labor used in textiles. As we move to the left from OS, labor used in steel increases, while labor used in textiles decreases. Thus the VMPS line is flipped and drawn with respect to its origin at OS. Every point along the horizontal axis corresponds to an allocation of labor between the two industries satisfying the labor constraint condition. Thus at a point like A, OTAunits of labor are used in textile production (LT) and OSA units of labor are used in steel production (LS). The sum of the two equals OTOS, which is the total labor endowment (L). At point E in Figure 5.14 "Specific Factor Model—Mussa Diagram", the two VMP lines intersect so that VMPT = VMPS, determining the unique wage rate w = wT = wS using all the available labor, OTOS. Thus at point E all four equilibrium conditions listed are satisfied. Effects of a Price Increase Prices will change whenever a country moves from autarky to free trade or when a country imposes a trade or domestic policy. At this stage, we will simply consider the effects of a price change within the context of the model without specifying why the change occurred. (In more technical terms, we say the price change is exogenous.) Later, we’ll introduce several situations to see how trade or trade policies will affect outcomes in the specific factor (SF) model. Suppose we begin with a country producing textiles and steel in an initial equilibrium given by point E in Figure 5.15 "Effects of a Price Increase". The original value of the marginal product lines is given by VMPT 1 and VMPS 1 , respectively. The initial labor allocation is OTA units to textiles and OSA units to steel. The initial wage rate in both industries is w 1 . Figure 5.15 Effects of a Price Increase Saylor URL: http://www.saylor.org/books Saylor.org 247
Now suppose the price of steel increases exogenously. The immediate effect will be to raise the value of the marginal product of steel, shifting up VMPS 1 to VMPS 2 . The new equilibrium is given at point F. At F, labor allocated to steel production will have risen to OSB, while labor used in textiles will have fallen to OTB. The equilibrium wage increases to w2. The intuition for these changes follows from the underlying dynamic effects. At first, when the price of steel rises, the wage and rental rates remain fixed. This means steel revenue rises while costs remain the same, stimulating an increase in steel profits. Positive profit, in a perfectly competitive market, induces new entry of firms into steel production, expansion of current firms in the industry, or both. To expand, steel must induce workers to move over from textile production. This requires an increase in the wage since labor demand temporarily exceeds labor supply. To prevent all the labor from shifting to steel, the textile industry must raise the wage to its workers as well. As labor shifts from textiles to steel and as the wage rises, the costs of production in steel and textiles rise. In steel, this erodes the temporary profits it was making. Textiles respond to the higher costs by cutting production and releasing workers. Remember, there is no ability to expand capital inputs in steel since we assume steel’s capital stock is fixed exogenously in size, and due to specificity, capital cannot be moved in from the textile industry. In the end, industry profits are driven to zero in both industries once the wage rises sufficiently. Saylor URL: http://www.saylor.org/books Saylor.org 248
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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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French production and consumption i
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5.1 Chapter Overview LEARNING OBJEC
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less-developed countries have much
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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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Page 200 and 201: Adding these two equations vertical
Page 202 and 203: 3. Write the magnification effect f
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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
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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 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 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
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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
Page 274 and 275: produced and if the costs of this e
Page 276 and 277: 6.3 Gains from Trade with Economies
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Page 282 and 283: model best describes markets in whi
Page 284 and 285: 2. Each firm produces a product tha
Page 286 and 287: 2. The demand assumption in which e
Page 288 and 289: Keep in mind that this is the equil
Page 290 and 291: KEY TAKEAWAYS A market equilibrium
Page 292 and 293: 1. If the product is such that an i
Page 294 and 295: varieties may increase aggregate we
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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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