Section+5 - Sec$on 5 Free Trade In Autarky (no...

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Unformatted text preview: Sec$on 5 Free Trade In Autarky (no trade) Cars US PUSa US PToys Slope = US PCars ΔC U(C,T) PChinaa ΔT China PToys Slope = China PCars ΔC ΔT China QUSa QChinaa Toys With Free Trade – Same Prices Cars US ΔC ΔC China Toys ΔT ΔT PToys Slope = PCars With Free Trade – Higher Consumer U$lity, Higher World Output Cars US PToys Slope = PCars No$ce consump$on off the PPF EX U(C,T) China Toys IM What happens to The Demand for the Specialized Good •  E.g. Cars in autarky: P US SUS PChinaa Pusa P China SChina D Q D Q What happens to The Demand for the Specialized Good – Global Market •  Hekcsher ­Ohlin – each country has same demand curve P World SUS+SChina PFT DUS + DChina QUS + QChina Q What happens to The Demand for the Specialized Good •  US Excess Supply (Exports) = China shortage P (Imports) P US SUS PChinaa China SChina PFT Pusa D Q US Exports China Imports D Q Welfare Under Autarky S CS Pa D Welfare Gains from Opening to Free Trade S CS Pa PFT D IM Imposing a Tariff Under Perfect Compe$$on – Small Country S CS PFT+T PFT PS Gov DWL D DWL Dead Weight Loss X+T X M Import Demand IMT IM IMT IM Imposing a Tariff Under Perfect Compe$$on – Large Country S CS Tariff Revenues inc. TOT improvement X+T X DWL P*+T PFT P* PS Gov DWL D TOT Improved Terms of Trade M IMT IM IMT IM Cost – Benefits of Early Specializa$on (Tariff )  ­ Increased Savings •  Tariff reduces consump$on →Save more (s↑) → k* (steady state capital/worker) increases → y*  ­ the level of steady state income increases •  30% tariff → price increases by 30% •  ΔQ% Assume: unit elas$city Δ P = = 1 → ΔP% P ΔQ Q 30% increase in price will result in 30% decrease in demand Cost – Benefits of Early Specializa$on (Tariff )  ­ Increased Savings •  If before tariff imports are 6% of GDP→ decline of 1.8% to 4.2% •  Benefits: Half of decline in consump$on is saved → 0.9%  ­ minuscule in comparison to 16% of investment rate at the $me •  Costs: Reduced Consumer Surplus (welfare) –  If Dead Weight Loss is 15% of the total decline in consumer surplus → 0.27% GDP welfare loss Cost – Benefits of Early Specializa$on (Tariff ) – Produc$vity Gains •  Manufacturing industry has a > average level of labor produc$vity → transferring workers from other, lower produc$vity sectors to manufacturing boosts average produc$vity in the economy → A↑ → Boosts the level of output in the economy •  Was agriculture less produc$ve? –  Large diff of produc$vity between North & South Cost – Benefits of Early Specializa$on (Tariff ) – Produc$vity Gains •  Assume: –  Produc$vity gain in manufacturing (compared to agriculture) of 50% –  50% tariff on manufactured goods –  Manufactured goods are 3% of imports (post 1860) –  Unit elas$city of demand for imports → 50% decline in imports == 1.5% of GDP – subs$tuted by increased manufacturing in US –  With 50% produc$vity gain → 0.5*1.5%=0.75% increase in GDP output Cost – Benefits of Early Specializa$on (Tariff ) – More Expensive Capital Goods •  Per Solow: ΔK = sY − δ K K •  If due to tariff τ the capital costs (1+τ) more, this is equivalent to a reduced saving rate: s s' = <s 1+τ •  E.g. Aoer Civil War s=20% & τ≃0.2 hence s’=16.66%  ­ a loss of 3.3% in investment annually •  This translate to a direct decline of 3.3% in steady state capital per worker (or capital / output ra$o) Cost – Benefits of Early Specializa$on (Tariff ) – More Expensive Capital Goods •  s k = Per Solow: ss δ + n + g and income per y ss = kα ss capita: •  The ra$o of steady state output aoer tariff to that before the tariff: α ⎛s ⎞ α ' ' y ss ⎛ k ss ⎞ s'⎞ (1 + τ ) ⎟ ⎛ 1 ⎞ α ⎛ =⎜ ⎟ = =⎜ = ⎝ s⎠ ⎝1 + τ ⎠ y ss ⎝ k ss ⎠ s⎟ ⎜ ⎝ ⎠ α Cost – Benefits of Early Specializa$on (Tariff ) – More Expensive Capital Goods •  With tariff τ=30% and share of capital α=0.33 we have an 8% loss in steady state level of income y 'ss ⎛ 1 ⎞ = y ss ⎝ 1.3⎠ 0.33 = 0.92 Cost – Benefits of Early Specializa$on (Tariff ) – Lost Benefits from Externali$es •  a model in which investment, and specializa$on in manufacturing, has long ­run dynamic effects on the growth rate of total factor produc$vity •  An economy’s “stock of industrial knowledge” is propor$onal to its stock of industrial capital. •  Past years net investments produce not only capital but knowledge: –  how to employ new produc8on technologies, make machines run more efficiently, manage workers and businesses in an industrial environment •  A Public Good  ­ rapidly becomes available to all producers through inspec8on of their compe8tors’ opera8ons and the hiring away of their compe8tors’ engineers. Cost – Benefits of Early Specializa$on (Tariff ) – Lost Benefits from Externali$es •  From Solow: Δy=αΔn + (1 ­α)Δk + ΔA –  That is the above men$oned loss due to the more expensive capital goods •  In New Growth Models: ΔA=ΔA’+μΔk –  Produc$vity (human capital) growth is a result of technological growth as well as growth in physical capital •  Hence: Δy=αΔn + (1 ­α+μ)Δk + ΔA’ •  Now fall in capital affects produc8vity growth (!) •  μ = 0.05 to 0.1 → results in 5.1%  ­ 11% decrease in income growth aTer 30 years due to the combined capital accumula8on & externali8es’ effect. Railroads •  Economies of Scale •  Natural Monopolies •  Innova$on in corporate structure and management •  Private rate of return: Net Earning / Total Costs soars from 4.2% (1870) to 17.5% (1879) •  Social rate of returns = economic benefits to the region as a whole (≠ social savings!) – of the Union Pacific: 15.3%n(1870)  ­ 42% (1879) •  RRs financed through bonds and stocks –  But stock holders do not receive the high returns! –  P > MC, Q<QPC ...
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