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lec07-eco101-11

lec07-eco101-11 - Lecture 7 c Marc-Andreas Muendler...

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International Trade Lecture 7 c Marc-Andreas Muendler University of California, San Diego October 13, 2011
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7. Distributional Consequences of Classic Trade Econ 101, c M. Muendler Distributional Effects of Trade Trade can have substantial effects on the income distribution within a trading country. The reasons include: Resources cannot move costlessly from one industry to another Industries differ in the factors of production they demand Trade liberalization changes the relative prices of final goods Changes in relative prices can be used to analyze distributional effects An equal proportional change in all prices has no real effects
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7. Distributional Consequences of Classic Trade Econ 101, c M. Muendler Relative Wages in Classic Trade Theory In all classic trade models, wages are equal across industries in both countries (identical factors earn identical incomes): w C = w W = w and w * C = w * W = w * . Across countries, wages differ in the Ricardian model: w > w * because labor productivity is higher in Home in all sectors. Proof . Home: P C = a LC · w , Foreign: P W = a * LW · w * , and a LC a LW < P C P W . So, a LC a LW < a LC · w a * LW · w * and w w * > a * LW a LW > 1 (Home labor is more productive at wine). Absent productivity differences in the other classic trade models, there is Factor Price Equalization
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7. Distributional Consequences of Classic Trade Econ 101, c M. Muendler Distribution Effects in the Heckscher-Ohlin Model Each country realizes overall gains from trade (improved world-wide factor allocation) The gains are unevenly distributed. Trade can have substantial distributional effects The relatively abundant factor gains unambiguously in real terms (Workers in Home gain) The relatively scarce factor loses unambiguously in real terms (Land owners in Home lose)
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7. Distributional Consequences of Classic Trade
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