trade agreement.docx - Trade agreement Although the country...

This preview shows page 1 - 3 out of 8 pages.

Trade agreementAlthough the country as a whole gains from liberalizing trade, we’ve seen that certain segments of the population will lose out.Asa general rule, free trade increases demand for factors of production that are domestically abundant. Free trade also decreases the supply of factors that are domestically scarce. In other words, free trade acts to equalize the supply of and demand for factors of production across countries.In turn, factor prices (such as wages) then start to converge across countries. The result: The owners of domestically scarce factors of production lose due to increased competition.The owners of domestically abundant factors gain from increased demand.As we discussed in the previous chapter, people earn income from ownership of the factors of production. Changes in factor prices as a result of international trade have a big effect on the distribution of income within a country. Let’s consider two examples of how trade has tipped the balance between owners of scarce and abundant factors of production: Bangladesh and the United States.Bangladesh is a small country in terms of land area, but a big one in terms of population. Imagine an area the size of Illinois or Iowa, with a population equal to half of the entire United States. In the days before there was much international trade, land owners in Bangladesh benefited greatly from their control over that scarce resource, using cheap labor that was in plentiful supply. In other words, land was scarce in relation to labor.As the country became more and more connected to international markets through trade, textile firms seeking cheap labor moved in. Bangladeshis began to earn enough from textile work to be able to import food from countries where land is less scarce. As a result, the price of labor has risen, and the price of land has fallen. The relative incomes of the owners of labor and land have changed accordingly.
The rapid growth of exports from countries like China and Bangladesh opens new opportunities—and some new debates.© Imaginechina/AP ImagesIn the United States, a more subtle change in the factor distribution of income has taken place. With its tech-savvy, highly educated population, the United States has a relative abundance of high-skilled labor—scientists, financial managers, engineers, and soon. In comparison with otherPage 438countries, the United States doesn’t have so many low-skilled workers. When the country didn’t engage in much trade, this was good for the low-skilled workers. They represented a scarce resource relative to high-skilled workers, which drove up the wages of low-skilled workers. In the 1950s, for instance, the United States was a great place to be a factory worker.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture