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Week 13 - Lecture A - ECON 4411A Fall 2011 Development...

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ECON 4411A, Fall 2011 Development Economics Summary Notes: Week 13, Lesson A Trade Policy and The Case against Free Trade Quote of the day: When you arise in the morning, think of what a precious privilege it is to be alive to breathe. to think, to enjoy, to love. Marcus Aurelius Antoninus Introduction This week we would consider gains and consequences of trade and try to under- stand why though the apparent benefits of free trade, countries seek to intervene in their patterns of trade and guide it in directions that are not spontaneously chosen by the market. Also we would try to understand the forces that bring some groups of countries together to form mutual spheres of free trade, while maintaining or increasing trade barriers with the rest of the world 1 . Standard Arguments for Gains from Trade We noted based on the models of trade that trade leads to the expansion of the PPF and thus increases overall welfare. This is the classical argument for trade based on theory. The basic argument of many trade models is that whenever the rate at which one commodity can be domestically transformed to another di ff ers domestically and internationally, there is scope for gainful expansion of production which leads to the outward shift of the PPF. However, gains from train do not cut across the population equally. In addition, potential gains from trade of a country does not necessarily mean that all groups concerned in a country actual gain from trade. Trade usually leads to a di ff erential benefits within a country. This di ff erential benefits is linked with the use of a particu- lar factor with trade and the neglect of another. For example, a country may specialize in cars and textile in autarky. If the country switching to cars solely post trade, there can be di ff erential benefits to people if the car industry is cap- ital intensive and the textile industry is labor intensive and factor endowments are held by di ff erent people in society. However, if every individual owns the same combination of inputs then it would not matter that the country is moving more towards car production. This is because in this case, individuals would have capital and labor in the same proportions, then even if particular factors gain and lose, the fortunes of every individual must move together. In contrast, if every individual owns di ff erent proportions of factors, then di ff erential benefit from trade are sure to arise. The case of individuals controlling di ff erent factors of production is more a reflection of what we find in reality. 1 This kind of behavior can be understood in terms of multilateral policies followed by groups of countries. 1
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In general, any factor of production that is intensively used in some com- modity in the absence of trade is likely to be hurt when trade results in increased imports of that commodity. Thus, the solution for the owners of such factors of production or industries is to lobby for protection, which is one reason why free trade is not always allowed by LDCS and DCs.
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