Presentation Transcript
Commerce and Coalitions: Review of International Trade Theory
Commerce and Coalitions
Comparative Advantage: Comparative Advantage 1. Comparative advantage –› trade
2. Gains from trade in an industry
3. Effects of a tariff
1. Comparative Advantage → → Trade: 1. Comparative Advantage → → Trade Different productivity
Different technology
Different factor endowments Definition: Lower relative price (not necessarily absolute)
Comparative Advantage: Comparative Advantage Technology: 1 K + 2 L = 1 Textile 2 K + 1 L = 1 Iron
Factor endowments:
Australia has 4 K and 2 L (2 iron or 1 tex)
Bulgaria has 2 K and 4 L (2 tex or 1 iron) Example: Common technology, different factor endowments:
Comparative advantage: Comparative advantage Iron Textiles A B W PA: Iron = 1/2 Textile PB: Iron = 2 Textile PWorld: 1 Iron = 1 Textile 2 1 1 2
Conclusions:: Conclusions: Trade improves welfare because higher indifference curves become reachable
Trade lowers price of Textiles in capital-rich country A, hurting laborers
Trade lowers price of Iron in labor-rich country B, hurting capital owners Intuition: Scarcity → High price. Trade reduces scarcity
2. Gains from trade in an industry Importing country (PD > PW): 2. Gains from trade in an industry Importing country (PD > PW) Q P S D PD QD PW QCW QPW PD: Domestic price PW: World price
2. Gains from trade in an industry Importing country (PD > PW): 2. Gains from trade in an industry Importing country (PD > PW) Q P S D PD QD PW QCW QPW Value of imports
2. Gains from trade in an industry Importing country (PD > PW): 2. Gains from trade in an industry Importing country (PD > PW) Q P S D PD QD PW QCW QPW Consumer gains: QD (PD - PW) + 1/2 (QCW - QD)(PD - PW) Consumer gain
2. Gains from trade in an industry Importing country (PD > PW): 2. Gains from trade in an industry Importing country (PD > PW) Q P S D PD QD PW QCW QPW Producer loss: QPW (PD - PW) + 1/2(QD - QPW)(PD - PW) Welfare
Gains > Losses Producer loss
2. Gains from trade in an industry Exporting country (PD < PW): 2. Gains from trade in an industry Exporting country (PD < PW) Q P S D PD QD PW QPW QCW Value of exports PD: Domestic price PW: World price
2. Gains from trade in an industry Exporting country (PD < PW): 2. Gains from trade in an industry Exporting country (PD < PW) Q P S D PD QD PW QPW QCW Producer gain: QD (PW - PD) + 1/2(QPW - QD)(PW - PD) Producer gains
2. Gains from trade in an industry Exporting country (PD < PW): 2. Gains from trade in an industry Exporting country (PD Losses
2. Gains from trade in an industry: 2. Gains from trade in an industry Conclusions: - Trade increases welfare
- Winners and losers
- Compensation? Importing country Exporting country P P Q Q S D S D Pl Cg Cg Pg Cl Pg
3. Effects of a tariff: 3. Effects of a tariff Q P S D PD PW QCW QPW PD: Domestic price PW: World price Imports with no tariff PT PT: Price with tariff QPT QCT Imports with tariff
3. Effects of a tariff: 3. Effects of a tariff Q P S D PD PW QCW QPW Consumer loss: A + B + C + D Imports with no tariff PT QPT QCT Imports with tariff A B C D
3. Effects of a tariff: 3. Effects of a tariff Q P S D PD PW QCW QPW Imports with no tariff PT QPT QCT Imports with tariff Gains: Producer gains: A A Government gains: C C Welfare loss: B D B + D
Why not compensate the losers?: Why not compensate the losers? Concentrated costs, diffuse benefits
Incentives to defect
Economic change shifts political power
Bargaining
Why bother?
Stolper-Samuelson: Stolper-Samuelson Intuition: scarcity -> high price
Factors of production that are more scarce domestically than globally have a higher price in the absence of trade
Domestically abundant factors are more valuable if there is trade
Domestic coalitions should depend on which factors are abundant
Trade and Cleavages: Trade and Cleavages Change occurs when:
Trade increases (transport costs decrease)
Relative factor endowments change (development: K increases) Land-Labor ratio Low K High K High (land) Low (land) (class
conflict) (urban-
rural) (urban-
rural) (class
conflict)