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Advanced International Trade Theory and Policy

by: Miss Romaine Grimes

Advanced International Trade Theory and Policy ECON 433

Marketplace > Pennsylvania State University > Economcs > ECON 433 > Advanced International Trade Theory and Policy
Miss Romaine Grimes
Penn State
GPA 3.64


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This 0 page Class Notes was uploaded by Miss Romaine Grimes on Sunday November 1, 2015. The Class Notes belongs to ECON 433 at Pennsylvania State University taught by Staff in Fall. Since its upload, it has received 14 views. For similar materials see /class/233104/econ-433-pennsylvania-state-university in Economcs at Pennsylvania State University.


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Date Created: 11/01/15
Advanced International Trade Lecture 4 Prof Tybout September 14 2006 Lecture outline Brief recap How big are the gains from trade Can trade lead to immiserizing growth Other sources of gains from trade A digression Macro in the background The workhorse models an overview Relevant reading Caves Frankel and Jones chapter 3 A brief recap We developed convex PPFs and showed that when producers maximize profits they choose the production point where the slope of the PPF ie the MRT matches p PXPy Y Slope PX Py A brief recap This implies the relative supply of each good is an increasing function of its relative price A brief recap Equating relative supply in home market and relative demand based on social indifference curves in the home market determines the autarky equilibrium A brief recap In the autarky equilibrium MRT MRS p Slope PX Py p A brief recap DXDX DYDY PP SXS sys V th free trade the relevant marketclearing condition is that global supply equals global demand for each good 7 A brief recap Since producers are still maximizing pro ts and consumers are still maximizing welfare MRT pW MRS holds A brief recap The total gain in social welfare U2 U0 can be decomposed into gains from exchange U1 U0 and gains from specialization U2 U1 Note that U is a hypothetical utility level that is tobserved in autarky or free trade Gains from Specialization Gains from exchange occur when a country trades without adjusting its production point They are present so long as world prices differ from autarky prices and consumers have some flexibility to adjust their consumption mix Gains from specialization occur when trade induces a country to move toward specialization in the goods it is relatively wellsuited to supply These gains are present whenever world prices differ from autarky prices and countries have some exibility to adjust their production le Gains from specialization How big are the gains from trade Jefferson s trade embargo December 1807March 1809 drove down the relative price of exportable goods Doug Irwin 2001 compares the value ofautarky production at free trade prices with the value of the free trade bundle at free trade prices The Jeffersonian Trade Embargo Sugar coffee iron etc Cotton flour etc Gains from specialization Irwin finds income losses on the order of 78 percent Similar gures emerge from a study ofthe opening of Japan in the 1980s Bernhofen and Brown 2000 find income gains amounting to 89 percent of GDP Gains from specialization and exchange Immiserizing growth Popular claim A country may be better off not trading if it is likely to suffer a large deterioration in the terms of trade Terms oftrade The price of a country s exports relative to the price of its imports Industrial products Primary products 1 5 Gains from specialization and exchange Why expect declining terms of trade With much ofthe developing world dumping primary products on world markets there would be downward pressure on the relative price of these goods Demand for primary products is income inelastic Also dropping the price of primary products doesn t generate much extra demand and output expansion leads to rapid decline in price There is resistance to southern penetration of northern markets antidumping laws multifiber agreements etc keeping demand low and inelastic Gains from specialization and exchange Prebisch and Singer Between 1875 and WWI the terms oftrade for developing countries fell 30 percent Pl920 P134920 Pl875 PA11875 The terms of trade were measured as the price of primary products imported by Britain including freight costs numerator relative to the price of manufactured products exported by Britain exclusive of freight costs Gains from specialization and exchange There was a significant drop in shipping costs over this period due to Suez canal Panama canal Steamboats Refrigeration Gains from specialization and exchange More recent studies nd no trend Ifthere were a deterioration in the relative price of primary products what would the best policy be What have developing countries actually done First protected More recently tried to open northern markets Tried to organize cartels andor exploit monopoly power Other sources of gains from trade 1 Scale economies It may be that by concentrating production in a single source that production can be made more efficient Trade allows for the consolidation of production 0 Plantlevel scale economies One big facility operates more efficiently than 2 or more small facilities eg widebody aircraft 0 Industrylevel scale economies An industry operates more efficiency when the producers are clustered close together eg Silicon valley carpet manufacturing in Georgia Other sources of gains from trade Product variety Trade enhances the menu of available products Consumers have varied tastes and individuals often prefer to vary their consumption patterns 2 v Similarly different producers need different specialized inputs Trade gives consumers access to a global menu of varieties Aside Why isn t one country likely to produce a little bit of everything Other sources of gains from trade 3 Market discipline effects Opening to trade gives consumers an alternative source for goods and thus limits the market power of domestic suppliers In some industries scale economies mean that there is room for only a limited number of producers eg autos in developing countries If they are guaranteed the entire domestic market these producers may not behave competitively Other sources of gains from trade 4 Trade can act as a conduit for technology diffusion Technology comes embodied in new capital goods and intermediates but it also provides a basis for learning through deengineering Some analysts have further argued that firms learn new technologies and managerial techniques by participating in export markets A digression Macro in the background We typically assume balanced trade presuming that countries neither deplete nor build up their foreign exchange reserves This should be a reasonable approximation to long run equilibrium but deviations from this condition occur especially over short time horizons Why Macro in the background Private saving S Y C T National income with no trade Y C l G Hence without trade 8 l G T Savings investment scal deficit Private savings Macro in the background When an economy trades some goods and services produced are exported X and some goods and services consumed are imports M so the identity becomes Y Cl G XM Once again substituting into S Y C T we find SClGXM C TlX MT G private investment current account surplus scal surplus Macro in the background SlX MT G Given savings and investment an increase in the scal de cit 1TG must be offset with an increase in the current account de cit 1XM If investment is falling 1 or savings is rising TS less adjustment in the current account de cit is necessary Macro in the background Percent of GDP Selected Series from the National Accounts 20 15 m Balance on current W account 10 Net private saving 5 WELL I w Fiscal surplus 0 l l l l l l l l l l QC 5 r a n Gross private it 3 3quot 3 190V r190 r190 quot domestic investment 10 Chronology During the 1990s the US gradually restored scal balance Nonetheless the trade balance began to deteriorate The reason was declining private savings and rising investment Falling investment and stabilizing savings should have pushed the current account back toward balance in the 00 s But beginning in 200001 the scal situation sharply reversed This turnaround re ected tax cuts and to a lesser extent new spending To import more than we export that is to consume more than we produce we must borrow from abroad 80 the current account deficit is matched by capital inflows ie foreigners are nancing the excess consumption of the United States 29 Workhorse trade models Overview Ricardian model Emphasizes interactions between technological differences wages and trade Also useful for analysis of sectorlevel increasing returns to scale Downplays the role of differences in factor endowments differences in tastes market distortions Workhorse trade models Overview HecksherOhlin model Emphasizes differences in factor endowments relation between factor rewards and trade Useful for the analysis of trade taxes and subsidies Downplays differences in technologies differences in tastes Workhorse trade models Overview Sgeci c factors model Like HecksherOhlin emphasizes differences in factor endowments but Focuses on instances where different sectors use different factors Thus especially useful for analysis winners and losersshortrun reactions to trade shocks Downplays differences in technologies differences in tastes The Ricardian model M91 Suppose the world is made up oftwo agrarian economies each of which can produce 2 goods pork P and beans B using a single input labor L and constant returns production technologies Tastes As in earlier lectures assume identical homothetic tastes The Ricardian model Good Workers per unit output Home United States Pork 4 more generally up Beans 8 more generally ab Foreign Canada Pork 2 more generally ap Beans 1 more generally ab The Ricardian model L 40 units oflabor in the US and L 20 units of labor in Canada aprabe L40 61pr61be L20 The Ricardian model B United States 13 Canada PpPb 12 The Ricardian model Autarky equilibrium QpQb


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