Advanced International Trade Theory and Policy - Lecture Notes | ECON 433, Study notes of Economics

Download Advanced International Trade Theory and Policy - Lecture Notes | ECON 433 and more Study notes Economics in PDF only on Docsity! 1 Advanced International Trade Lecture 5 Prof. Tybout September 19, 2006 2 Lecture outline • A digression: Macro in the background • The workhorse models—an overview • A simple Ricardian model • A Ricardian model with increasing returns to scale. Relevant reading: Caves, Frankel and Jones, chapter 4 Reminder: Problem set due Thursday, Sept. 21 2 3 A digression: Macro in the background – We typically assume balanced trade, presuming that countries neither deplete nor build up their foreign exchange reserves. – This should be a reasonable approximation to long run equilibrium, but deviations from this condition occur, especially over short time horizons. Why? 4 Macro in the background • Private saving: S = Y - C - T • National income with no trade: Y = C + I + G • Hence without trade, S = I + (G – T) Savings = investment + fiscal deficit 5 9 Workhorse trade models: Overview Ricardian model: – Emphasizes interactions between technological differences, wages and trade – Also useful for analysis of sector-level increasing returns to scale. – Downplays the role of differences in factor endowments, differences in tastes, market distortions 10 Workhorse trade models: Overview Hecksher-Ohlin model: – Emphasizes differences in factor endowments, relation between factor rewards and trade. – Useful for the analysis of trade taxes and subsidies. – Downplays differences in technologies, differences in tastes 6 11 Workhorse trade models: Overview Specific factors model: – Like Hecksher-Ohlin, emphasizes differences in factor endowments, but – Focuses on instances where different sectors use different factors. Thus especially useful for analysis winners and losers/short-run reactions to trade shocks – Downplays differences in technologies, differences in tastes 12 The Ricardian model • Technology Suppose the world is made up of two agrarian economies, each of which can produce 2 goods: pork (P) and beans (B) using a single inputlabor (L)and constant returns production technologies. Tastes As in earlier lectures, assume identical, homothetic tastes 7 13 The Ricardian model Good Workers per unit output Home (United States) Pork 4 (more generally, ) Beans 8 (more generally, ) Foreign (Canada) Pork 2 (more generally, ) Beans 1 (more generally, ) pa ba * pa * ba 14 The Ricardian model • L = 40 units of labor in the U.S. and L*= 20 units of labor in Canada: 40==+ LQaQa bbpp 20***** ==+ LQaQa bbpp 10 19 The Ricardian model • Consider shifting one unit of pork production from Canada to the U.S. – This allows Canada to produce 2 more units of beans. – The U.S. gives up ½ a unit of beans to produce the extra unit of pork, – So together, the U.S. and Canada are up 2 – ½ = 1½ units of beans. • Whenever MRTs differ across countries, the possibility for mutually beneficial arbitrage is there. 20 The Ricardian model Trading equilibrium 1/2 2 w b w p Q Q w b w p P P 10/20 11 21 The Ricardian model Trading equilibrium QP QP* QB* United States Canada QB 22 The Ricardian model When the U.S. and Canada trade, what happens to the U.S. wage in terms of the price of pork? = ¼ p w p aP w 1 = What happens to the U.S. wage in terms of beans? =         ⋅         = w b w p w p w b P P P w P w         ⋅        >         ⋅        b p p w b w p p P P aP P a 11 12 23 The Ricardian model • Does free trade mean wage equalization? • The higher the world price of pork, and the more productive the U.S. workforce in pork production, the better off are U.S. workers p bw b w b p w p a ap aP aP w w * */ / * == wp w w 4 1 * = 24 The Ricardian model • Suppose one country had been very small. How would the effects of trade have been different?