Ch5_Winners&Losers From Trade_Rev

Ch5_Winners&Losers From Trade_Rev - Overview...

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Unformatted text preview: Overview Questions WHO GAINS AND WHO LOSES FROM TRADE? • What are the income distribution effects of trade? Who gains, who loses? Why are there so many opponents to free trade? • What are the actual patterns of trade? Does H-O explain what we see? 1 4 Review Review (concl.) concl.) 2 countries, 2 goods, 2 factors of production • Absolute or Relative advantage: The “2x2x2” model Factors can be Labor and Capital, or Labor and Land Export what you make relatively cheaply, import the other Increasing marginal costs of production Differences in technologies (or costs) drive trade • Same technologies: Labor fully mobile domestically Labor not mobile internationally Full employment No trade barriers, perfect competition No MONEY, which means no money prices Export what you make relatively cheaply, import the other Differences in endowments drive trade 5 6 H-O Example Implications of H-O Wheat is land-intensive Cloth is labor-intensive • Relative prices of goods will change Both countries export the good that was cheaper under autarky Wheat United States Land-abundant Wheat 100 Relative price of the export will rise Relative price of the import will fall Rest of the World Labor-abundant 100 Utility Increases Utility Increases This is true in both countries 50 Like the “large country” case in the Ricardian model 50 7 100 Cloth 100 8 Cloth •1 Implications of H-O Implications of H-O • Factor prices will equalize • There will be winners and losers The owners of the factor of production more intensively used in the expanding sector will gain gain Factors of production like capital and labor earn the same rate of returns in both countries This requires identical technologies Doesn’t require trade in the factors! In the U.S. land rents rise In the RoW labor wages rise The owners of the factor of production more intensively used in the contracting sector will lose lose In the U.S. labor wages fall In the RoW land rents fall Land rents were higher in RoW than the U.S. They fall in RoW & they rise in the U.S. Wages were lower in RoW than in the U.S. They rise in RoW & they fall in the U.S. This is known as the “Stolper-Samuelson theorem” 11 A Little More Insight on H-O H- 12 A Little More Insight on H-O H- • What is behind these possibly strange conclusions? • But why would factor prices equalize without factor mobility? Take the U.S. It is land-abundant and labor-poor (in the example) In trying to provide cloth for consumption (inefficiently by world standards), wages are being bid up Relative shortage of labor Land: there is lots of land, so its rent is low With trade, land is utilized more intensively and labor less so! Rents to factors along with product prices adjust accordingly product Wages and land rentals in this case • Consider what happens if land rents are higher in RoW (& wages lower) than in the U.S. With lower land rents, there will be more profits for U.S. farmers to increase wheat production Lower wages in RoW mean there is profit in producing more cloth (and less wheat) 13 Are the Short and Long Runs Different? • Opening to trade generally results in some specialization in production, Consumption changes because price changes In the U.S. price of Wheat rises, that of Cloth falls Wheat Cloth Opposite in RoW But overall wealth increases at the same time It doesn’t mean everyone is better off BUT, even as labor income falls, cloth has become cheaper; their consumer side is better off 14 Are the Short and Long Runs Different? • Opening to trade generally results in some specialization in production, Production patterns change, dramatically than consumption typically more In the models Specialization towards comparative advantage Of course, they are not the only ones in the economy any more! Once again, full employment is critical 15 15 16 16 •2 The Short and Long Run (cnt) cnt) The Short and Long Run (cnt) cnt) • The shift in production requires factors to shift U.S. workers have to move from cloth manufacturing to wheat production. This happens via disappearing “cloth” jobs (jobs being exported overseas) layoffs, voluntary retirements, firings Workers are attracted to wheat production with job searches advertisements signing bonuses better pay • Before factors can shift, there will be Higher rents to land cultivated for wheat Higher wages to wheat workers Lower wages to cloth workers Lower rents to land dedicated manufacturing to cloth • That is what makes factors move! 17 The Short and Long Run (concl.) concl.) 18 An Example for the Intuition • Total K = 200, total L = 100 • 2 sectors, X & Y • Remember that in equilibrium wages and land rents are the same for both sectors Suppose Kx/Lx = 125/50, and Ky/Ly = 75/50, and at the going w and r everyone is happy X is capital intensive & Y is labor-intensive labor- Open to trade & X is being exported That is a way to understand why banks are fighting to not get bonuses regulated! Means the country is relatively capital-abundant capital- 19 An Example for the Intuition 20 An Example for the Intuition • Total K = 200, total L = 100 Kx/Lx = 125/50 = 2.5, and Ky/Ly = 75/50 = 1.5 Open to trade & X is being exported If Y cuts its production by 10%, it will release K=7.5 & L=5 But X to employ 7.5 capital would need to hire 3 workers (K/L = 2.5). So 2 workers will be unemployed, at least initially 21 But X to employ 7.5 capital would need to hire 3 workers (K/L = 2.5). So 2 workers will be unemployed This will cause wages to fall & cap rental to rise The result will be that Y will let a little more capital go, and X will lower somewhat it K/L (as K becomes expensive & L cheaper) As the X industry grows, its K/L must approach that of the country’s (in this case 2) country’ 22 •3 Figure 5.2 – Winners and Losers: Short Run v.s. Long Run v.s. Example • • • • Perfect competition; P = MC 2 products (wheat & cloth) Pwheat = 60w + 40r Pcloth = 75w + 25r These come from the prod function + maximization The “numbers” are the units of each factor used to produce one unit of output • Let Pwheat = Pcloth = 200 23 25 25 Example Application Pwheat = 60w + 40r Pcloth = 75w + 25r • The U.S. has export and import sectors 1. What are the equilibrium wage and rental rates? 2. What are the rental and labor costs per unit of output? 3. If Pcloth goes to 240, what happens to wages and rental rates? Assume export sector is high-skill labor intensive and import is low-skill labor intensive U.S. is high-skill labor abundant • Who will support freer trade in U.S.? 26 26 34 Shares of “World’s Factor Endowments, Early 2000s Are the Heckscher-Ohlin Predictions Supported By the Data? Physical Capital Unites States • Neat theory but does it help explains anything? If not, why not? Canada Japan Germany • The theory is broadly consistent with the data as long as we measure the quantity of factor endowments properly Highly Skilled Labor Medium Skilled Labor Unskilled Labor Arable Land Forest land 26.2 % 30.5 % 8.2 % 0.7 % 17.0 % 8.5 % 2.2 % 1.4 % 1.1 % 0.1 % 4.4 % 9.6 % 22.0 % 7.3 % 4.2 % 1.1 % 0.4 % 1.0 % 6.8 % 3.2 % 3.0 % 0.6 % 1.1 % 0.4 % France 1.7 % 1.8 % 0.8 % 1.8 % 0.6 % 3.7 % 2.4 % 1.4 % 0.7 % 0.6 % 0.1 % Other industrialized countries 16.5 % 10.2 % 8.2 % 2.8 % 8.7 % 10.5 % China Developing countries 4.5% 13.9 % 11.7 % 31.6 % 30.6 % 41.1% 24.6 % 68.7% 13.7 % 52.3 % 6.4 % 62.5 % 100.0 % 100.0 % 100.0 % 35 4.2 % United Kingdom 100.0 % 100.0 % 100.0 % 36 36 •4 U.S. International Trade in Selected Products, 2004 U.S. Exports ($billions) U.S. Imports ($billions) Wheat 4.81 0.16 Corn 5.64 0.13 95 Coffee 0.40 2.27 -70 Soybeans 5.74 0.05 98 Coal 2.34 1.02 8.86 136.00 U.S. International Trade in Selected Products, 2004 39 Crude Petroleum Product (SITC classification) Net Export as % of Total Trade Product (SITC classification) Consistent with H-O Theory U.S. Exports U.S. Imports Net Export as % ($billions) ($billions) of Total Trade 94 Inconsistent with H-O Theory 23.98 35.37 Perfumes and cosmetics 3.83 3.76 1 -88 Iron and steel (is it?) 8.71 28.12 -53 Automobiles 22.81 122.77 -69 9.10 9.77 -4 Primary plastic materials 18.51 9.07 34 Electronic microcircuits 38.59 22.38 27 Aircraft Pharmaceuticals Medical instruments 38.52 16.48 40 Clothing and accessories 5.06 75.73 -87 Shoes and other footwear 0.65 17.40 -93 Toys 0.61 9.35 -19 -88 37 38 Figure 5.6 - The Factor Content of Canada’s Canada’ Exports and Imports Figure 5.5 – The Factor Content of U.S. Exports and Imports 39 China International Trade in Selected Products, 2003 Product (SITC classification) China Exports China Imports ($billions) ($billions) Net Exp as % of Total Trade 40 What Is Left Out of Consideration? • Sustainability of the trade Here trade is stuff that is being produced But there is trade also in non-renewable resources Soybeans 0.1 5.4 -96 Metal ores 0.3 11.8 -95 Crude petroleum 1.7 19.8 -84 Special industrial machinery 4.0 21.0 -68 Computers 41.0 11.4 56 Audio equipment 10.5 0.8 86 Electronic microcircuits 6.4 41.1 -73 Clothing & accessories 52.1 1.4 95 Shoes & other footwear 13.0 0.4 94 No indirect effects 6.2 20.3 -53 That is not always so Toys 14.5 0.5 93 Corn 1.8 0.0 100 Vegetables 3.4 0.3 84 Scientific equipment • Possible externalities In the H-O model, changes in the composition of production have no externalities Say R&D moves from a country! 41 42 •5 What Is Left Out of Consideration? What Is Left Out of Consideration? • What if marginal costs decline? We’ll consider this soon in the course • Capital & Labor are not internationally mobile How do things change if they are? What then defines a “country” • Can trade impact negatively economic growth at home or abroad? • During the Japan-U.S. negotiations in 1955, the Japanese trade negotiator Kenichi Otabe is reported to have said: “If the theory of international trade is pursued to its ultimate conclusion, the U.S. would specialize in the production of automobiles and Japan in the production of tuna.” From “Free Trade Doesn’t Work,” by Ian Fletcher We’ll talk about growth, though the answer to this question is unclear 43 Key Summary Points 44 Key Summary Points • The Heckscher-Ohlin considerations complement the previous theories by showing that countries may have different production costs • The empirical evidence is quite supportive of H-O • There are economic considerations that can modify or reverse the conclusions reached in the H-O model not only because they have access to different technologies, but also because they have different availability of production factors • The factors used intensively in the “cheap” product benefit • The factors used intensively in the “expensive” product lose 45 46 THE END 47 •6 ...
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