02 trade theory

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Published on January 22, 2008

Author: Dolorada

Source: authorstream.com

Commerce and Coalitions:  Review of International Trade Theory Commerce and Coalitions Comparative Advantage:  Comparative Advantage 1. Comparative advantage –› trade 2. Gains from trade in an industry 3. Effects of a tariff 1. Comparative Advantage → → Trade:  1. Comparative Advantage → → Trade Different productivity Different technology Different factor endowments Definition: Lower relative price (not necessarily absolute) Comparative Advantage:  Comparative Advantage Technology: 1 K + 2 L = 1 Textile 2 K + 1 L = 1 Iron Factor endowments: Australia has 4 K and 2 L (2 iron or 1 tex) Bulgaria has 2 K and 4 L (2 tex or 1 iron) Example: Common technology, different factor endowments: Comparative advantage:  Comparative advantage Iron Textiles A B W PA: Iron = 1/2 Textile PB: Iron = 2 Textile PWorld: 1 Iron = 1 Textile 2 1 1 2 Conclusions::  Conclusions: Trade improves welfare because higher indifference curves become reachable Trade lowers price of Textiles in capital-rich country A, hurting laborers Trade lowers price of Iron in labor-rich country B, hurting capital owners Intuition: Scarcity → High price. Trade reduces scarcity 2. Gains from trade in an industry Importing country (PD > PW):  2. Gains from trade in an industry Importing country (PD > PW) Q P S D PD QD PW QCW QPW PD: Domestic price PW: World price 2. Gains from trade in an industry Importing country (PD > PW):  2. Gains from trade in an industry Importing country (PD > PW) Q P S D PD QD PW QCW QPW Value of imports 2. Gains from trade in an industry Importing country (PD > PW):  2. Gains from trade in an industry Importing country (PD > PW) Q P S D PD QD PW QCW QPW Consumer gains: QD (PD - PW) + 1/2 (QCW - QD)(PD - PW) Consumer gain 2. Gains from trade in an industry Importing country (PD > PW):  2. Gains from trade in an industry Importing country (PD > PW) Q P S D PD QD PW QCW QPW Producer loss: QPW (PD - PW) + 1/2(QD - QPW)(PD - PW) Welfare Gains > Losses Producer loss 2. Gains from trade in an industry Exporting country (PD < PW):  2. Gains from trade in an industry Exporting country (PD < PW) Q P S D PD QD PW QPW QCW Value of exports PD: Domestic price PW: World price 2. Gains from trade in an industry Exporting country (PD < PW):  2. Gains from trade in an industry Exporting country (PD < PW) Q P S D PD QD PW QPW QCW Producer gain: QD (PW - PD) + 1/2(QPW - QD)(PW - PD) Producer gains 2. Gains from trade in an industry Exporting country (PD < PW):  2. Gains from trade in an industry Exporting country (PD < PW) Q P S D PD QD PW QPW QCW Consumer loss: QCW (PW - PD) + 1/2(QD - QCW)(PW - PD) Consumer loss Welfare Gains > Losses 2. Gains from trade in an industry:  2. Gains from trade in an industry Conclusions: - Trade increases welfare - Winners and losers - Compensation? Importing country Exporting country P P Q Q S D S D Pl Cg Cg Pg Cl Pg 3. Effects of a tariff:  3. Effects of a tariff Q P S D PD PW QCW QPW PD: Domestic price PW: World price Imports with no tariff PT PT: Price with tariff QPT QCT Imports with tariff 3. Effects of a tariff:  3. Effects of a tariff Q P S D PD PW QCW QPW Consumer loss: A + B + C + D Imports with no tariff PT QPT QCT Imports with tariff A B C D 3. Effects of a tariff:  3. Effects of a tariff Q P S D PD PW QCW QPW Imports with no tariff PT QPT QCT Imports with tariff Gains: Producer gains: A A Government gains: C C Welfare loss: B D B + D Why not compensate the losers?:  Why not compensate the losers? Concentrated costs, diffuse benefits Incentives to defect Economic change shifts political power Bargaining Why bother? Stolper-Samuelson:  Stolper-Samuelson Intuition: scarcity -> high price Factors of production that are more scarce domestically than globally have a higher price in the absence of trade Domestically abundant factors are more valuable if there is trade Domestic coalitions should depend on which factors are abundant Trade and Cleavages:  Trade and Cleavages Change occurs when: Trade increases (transport costs decrease) Relative factor endowments change (development: K increases) Land-Labor ratio Low K High K High (land) Low (land) (class conflict) (urban- rural) (urban- rural) (class conflict)

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