Specific%20Factors%20Model - CHAFTER 3 [,]...

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Unformatted text preview: CHAFTER 3 [,] r",.triior tl^s z, r d [ r t r r r - , : - r I r i r ( : i l ; t ' S . 1 . f n [ ; , u f : i r , ! , [ r 1 A s we saw in Chapter 2, irrternational trade can be mutually berreficial to the nations I r..engaged in it. Yet throughout history, governments have protected sectors of the economy from import: competition. For example, despite ics commitment in principle to free trade, tlre United State:; limits irnports of textiles, sugar, and other cornmodities. lf trade is suclr a good thing for the economy, why is there opposition to its effectsf To understand tlre p,tlitics of trade, it is ttecessar)/ to lool< at the effects of tradr:, not just on a coLnrtry as a whole but on tlre distribution of income within that country. Tlre Ricardian nro,lel of internati,tnal trade developed in Chapter 2 illustrates the potential benefits frorr trade. lrr that nrodel trade leads to international specialization, vrith each country shifting its labor force from indusries in which that labor is relatively ineffi- cietrt to industries in v.rhich it is relatively more efficient. Because labor is the only factor of production irr the moclel,arrd it is assunred to be able to move freely from one industry, 1e another, there is no possibility that individuals will be hr,rrt by trade.The Ricardian model thus suggests not only that all countries gain from trade, but that every individuol is made better off as a result of international trade, because trade does not affect the distribution of income. In the real world, however. trade has substantial effects on the income distrib- Lrtion within each trading nation, so that in practice dre benefits of trade are often distr-ib- uted very unevenly. There are two mairr reasons why international crade has strong effects on the distribu- tion of income. First, resources cannot move immediately or costlessly from one industry to another. SeconrJ, industries differ in the factors of production they demand:A shift in the rnix of goods tlrat a councry Jrroduces will ordinarily reduce the demand for some factors of production,while raising the demand for otlrers. For both of rhese reasons, international trade is not as unambiguously beneficial as it appeared to be in Cha.pter 2.While trade rnay benefic a nation as a whole, it often hurts significant groups within the country, at least in t h e s h o r t r u n . Consider the effects of Ja;ran's rice policy.Japan allows very little rice to be imported, even though the scarcity of land means that rice is much more expensive to produce in Japan t.han in other countries (including the United States). There is little question that J a p a n a s a w h o l e w o u l d h a v e a h i g h e r s t a n d a r d o f l i v i n g i f f r e e i m p o r t s o f r i c e w e r e a l l o w e d . J a p a n e s e r i c e f a r m e r s , h o w e v e r , w o u l d b e h u r t b y f r e e t r a d e . W h i l e t h e f a r m e r s S,p) rrrc rfr c 3 8 C H A P T E R 3 S p e c i f i c F a c i : o r s...
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This note was uploaded on 02/09/2011 for the course ECON 181 taught by Professor Kasa during the Fall '07 term at University of California, Berkeley.

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Specific%20Factors%20Model - CHAFTER 3 [,]...

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