lecture note 6

Result bad trade a subsidy can generate exports but

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Unformatted text preview: an generate exports, but do not confuse exports with welfare. “If it ain’t broke, don’t fix it”. 8 Two identical countries: identical autarky = free trade equilibria at A in Figure 10.3 Let country h put a subsidy on X2. This will shift production in h from X1 to X2. At the old prices, excess supply of X2 and excess demand for X1. (Passive) country f will be drawn into specializing in and exporting X1. Figure 10.3: passive country f gains from trade - silly country h is selling X2 for less than the cost of production. Figure 10.3 Figure 10.4 X2 Uf X2 X2 Xh A Dh Df p1 p2 Ua A Xf Us S Uh p p* X1 X1 X1 9 Production externalities Suppose that there are positive “spillovers” among firms in sector 1. (a) anything learned by one firm can be costlessly copied by all. Firms creating new knowledge/techniques cannot control or charge for this (b) a large market leads to the creation of specialized intermediate inputs that raise the productivity of all firms. Each firm takes the range of intermediates as fixed (exogenous to its own decisions). Each firm’s output depends on the total output of the sector, which is taken as exogenous. (10.5) where 0 #" < 1 is an externality parameter: " = 0 is the special case of no externality, in which case the model reduces to the Ricardian model of Chapter 7. 10 In competitive equilib...
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