Trade and Economies of Scale

Trade and Economies of Scale - • There is a relationship...

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Trade and Economies of Scale From Last Time The Stolper-Samuelson theorem simply says that a move to free trade benefits resources used intensively in the export sector and hurts the resources used intensively in the import-competing sector. The Factor Price Equalization theorem says that, under certain assumptions, resources prices will be the same everywhere under free trade. For example, NAFTA ought to encourage the importation of unskilled labor-intensive products from Mexico into the United States. The demand for unskilled labor in Mexico will rise, causing wages to go up there. The demand for unskilled labor in the U.S. will fall due to the competition from imports. So, the demand for unskilled labor in this country will fall along with wages. Under certain assumptions, wages in the U.S. and Mexico will eventually be the same.
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Unformatted text preview: • There is a relationship between government budget deficits and the trade deficit. The budget deficit raises interest rates. Higher interest rates attract foreign investors, but to invest here they need dollars. The resulting higher demand for dollars raises the exchange rate value of the dollar. A stronger dollar makes U.S. products more expensive for foreign buyers and foreign products cheaper to American buyers. So, we export less and import more. The result is a bigger trade deficit. • The idea behind immiserizing growth is that if a country experiences growth in its export sector, the resulting increase in supply will push down the price of its exports. Even though it is exporting a larger quantity, the price might fall so much that its revenues for exports will be smaller than before....
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