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GWLecture7 - Part IIa Paper 1 General Equilibrium and...

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Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Sönje Reiche
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2 Outline: Focus on Trade Issues Inequality and Globalisation Welfare effects of trade: who gains and who loses in Ricardo and in H-O. Krugman & Obstfeld, Ch. 3,4 Partial Equilibrium analysis of tariffs General Equilibrium analysis of tariffs Krugman & Obstfeld, Ch. 8
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3 Application 1: Inequality Two factors: skilled and unskilled labour Two industries with different factor intensities “North”: skilled labour abundant “South”: unskilled labour abundant Assume common technology Autarky South U S North U S w w w w < South U S North U S p p p p <
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4 Free Trade “North” exports skilled-labour intensive good final goods prices equalise wages of unskilled workers in the “North” fall wages of skilled workers rise
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5 Heckscher-Ohlin Inequality between countries due to technological differences Ricardo Within a country: abundant factor gains, scarce factor loses Idea of factor price equalisation across countries wages of unskilled workers in the “North” fall wages of skilled workers in the “North” rise inequality due to North-South trade Inequality
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6 Problems model implies wages of skilled workers are equalising and that prices in different countries are equalising … need role for technology and skilled-biased technical progress
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