International Trade - Theory and Policy, 2010a

First, consider the owners of capital in the export industry before trade liberalization occurs. The series of
models suggests that they will gain in the short run, gain in the medium run, and gain in the long run.
However, the transition stories suggest that initial short-run gains would be followed by an increase in
these gains in the medium run, but owners would suffer a reduction in their gains in the long term. The
dynamic path might look like the red line depicted in Figure 5.19 "Dynamic Export-Capital Income Effects of
Trade Liberalization". Note that although the factor gains throughout the transition, the magnitude of its
gains varies.
The models suggest that owners of capital initially in the import industry lose in the short run, will lose
further in the medium run, but will ultimately gain in the long run. Its dynamic path might look like the
red line in Figure 5.20 "Dynamic Import-Capital Income Effects of Trade Liberalization". Since this factor
experiences both gains and losses, one way to evaluate whether these factor owners are indeed better off
would be to calculate the present discounted value of this stream of costs and benefits. If the period of
losses is sufficiently large or lasts long enough or if the discount rate is high and the person is myopic, the
present value may be negative. Otherwise, the discounted value will be positive.
Saylor URL: http://www.saylor.org/books
Saylor.org
262