GLOBALIZATION: TRADE, MIGRATIONS AND MULTINATIONALS - UNIBO, Slide di Economia

Scarica GLOBALIZATION: TRADE, MIGRATIONS AND MULTINATIONALS - UNIBO e più Slide in PDF di Economia solo su Docsity! GLOBALIZATION: TRADE, MIGRATIONS AND MULTINATIONALS Peron US. ao n EU *. CHAPTER2- World trade — the 5 largest trading partners with the US in 2008 were Canada, China, Mexico, Japan and Germany # Gnam — the largest 15 partners with the US accounted for 69% of the value of US trade in 2008 — Thegravity model Ò Cin itien - 3 of the top 10 trading partners with the US were also 3 of the largest european economies: se Germany, UK, France (they have the largest GDP in Europe). Why does the US trade with them ‘and not other European countries? — Size is important! The size of the economy is directly correlated to the volume of import and exports. Other things besides size matter for trade: eva 1. Distance between markets influences transportation costs and therefore the cost of imports and exports. — Distance may also influence personal contact and communication, which may influence trade. Cultural affinity: if two countries have cultural ties, it is likely that they also have strong economic ties. Geography: ocean harbors and a lack of mountain barriers make transportation and trade easier. Multinational corporations: corporations spread across different nations import and export many goods between their divisions. Borders: crossing borders involves formalities that take time and perhaps monetary costs like tariffs. — These implicit and explicit costs reduce trade. — The existence of borders may also indicate the existence of different languages (see 2) or different currencies, either of which may impede trade more. PAWN In its basic form, the gravity model assumes that only size and distance are important for trade in the following way: Tj=Ax Yi x Y; /Dj - where Tij is the value of trade between country i and country j, A is a constant Yi the GDP of country i, Yj is the GDP of country j, Dij is the distance between country i and country j In a slightly more general form, the gravity model that is commonly estimated is Tj;=AxY;®x vY;j Di ‘where a, b, and c are allowed to differ from 1. Despite its simplicity, the gravity model works fairly well in predicting actual trade flows, as the figure above representing U.S.-EU trade flows suggested. Estimates of the effect of distance from the gravity model predict that a 1% increase in the distance between countries is associated with a decrease in the volume of trade of 0.7% to 1%. Besides distance, borders increase the cost and time needed to trade. Trade agreements between countries are intended to reduce the formalities and tariffs needed to cross borders, and therefore to increase trade. The gravity model can assess the effect of trade agreements on trade: does a trade agreement lead to significantly more trade among its partners than one would otherwise predict given their GDPs and distances from one another? Fig. 2-3: Economic Size and Trade The U.S. signed a free trade agreement with Mexico and Canada in 1994, the North American Free Trade with the United States Agreement (NAFTA). Pagnaigo Because of NAFTA and because Mexico and Canada are close to the U.S., the amount of trade between the» U.S. and its northern and southem neighbors as a fraction of GDP is larger than between the U.S. and Fendi European countries. Yet even with a free trade agreement between the U.S. and Canada, which use a common language, the +; border between these countries still seems to be associated with a reduction in trade. Has the World Become “Smaller”? * The negative effect of distance on trade according to the gravity models is significant, but has grown smaller over time due to modern transportation and communication. ee R1Gbk: * Technologies that have increased trade: Fig. 2-4: Canadian Provinces and U.S. States That Trade — Wheels, sails, compasses, railroads, telegraph, steam power, automobiles, telephones, with British Columbia airplanes, computers, fax machines, Internet, fiber optics, personal digital assistants, GPS satellite... * Political factors, such as wars, can change trade patterns much more than innovations in transportation and communication. * World trade grew rapidly from 1870 to 1913. — Thenit suffered a sharp decline due to the two world wars and the Great Depression. — Itstarted to recover around 1945 but did not recover fully until around 1970. * Since 1970, world trade as a fraction of world GDP has achieved unprecedented heights World Exports asa Percentage of World GDP. 0 s6 913 19 DI ss 973 105 598 na Changing Composition of Trade * What kinds of products do nations trade now, and how does this composition compare to trade in the past? Son: Ago Madia, he Wink can A ima Fempect, Wert ek, 0 * Today, most (about 55%) of the volume of trade is in manufactured products such as automobiles, computers, clothing and machinery. — Services such as shipping, insurance, legal fees, and spending by tourists account for about 20% of the volume of trade. — Mineral products (ex., petroleum, coal, copper) and agricultural products are a relatively small part of trade. * In the past, a large fraction of the volume of trade came from agricultural and mineral products. — In 1910, Britain mainly imported agricultural and mineral products, although manufactured products still represented most of the volume of exports. — In 1910, the U.S. mainly imported and exported agricultural products and mineral products. — In 2002, manufactured products made up most of the volume of imports and exports for both countries. *Low- and middle-income countries have also changed the composition of their trade. — In 2001, about 65% of exports from low- and middle-income countries were manufactured products, and only 10% of exports were agricultural products. — In 1960, about 58% of exports from low- and middle-income countries were agricultural products and only 12% of exports were manufactured products. Service Outsourcing * Service outsourcing (or offshoring) occurs when a firm that provides services moves its operations to a foreign location. — Service outsourcing can occur for services that can be performed and transmitted electronically. * For example, a firm may move its customer service centers whose telephone calls can be transmitted electronically to a foreign location (UK X-rays sent to Indian doctors). Fig. 2.6: The Changing Composition of Developing Country Exports Summary 1. The S largest trading partners with the U.S. are Canada, China, Mexico, Japan, and Germany. 2. The largest economies in the EU undertake the largest fraction of the total trade between the EU and the U.S. da mo de de ne 3. The gravity model predicts that the volume of trade is directly related to the GDP of each trading partner and is inversely related to the distance between them. 4. Besides size and distance, culture, geography, multinational corporations, and the existence of borders influence trade. 5. Modem transportation and communication have increased trade, but political factors have influenced trade more in history. 6. Today, most trade is in manufactured goods, while historically agricultural and mineral products made up most of trade. *. CHAPTER2- The Ricardian Model * Theories of why trade occurs: — Differences across countries in labor, labor skills, physical capital, natural resources, and technology — Economiesof scale (larger scale of production is more efficient) * Sources of differences across countries that lead to gains from trade: — TheRicardian model (Chapter 3) examines differences in the productivity of labor between countries. “Technological” explanation. — The Heckscher-Ohlin model (Chapter 4) examines differences in labor, labor skills, physical capital, land, or other factors of production between countries. “Endowment” explanation. * The Ricardian model uses the concepts of opportunity cost and comparative advantage. * The opportunity cost of producing something measures the cost of not being able to produce something else with the resources used. * For example, a limited number of workers could produce either wine or cheese. — The opportunity cost of producing wine is the amount of cheese not produced. — The opportunity cost of producing cheese is the amount of wine not produced. «A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than in other countries (example with roses & computers in the book). A One-Factor Ricardian Model * The simple example with roses and computers explains the intuition behind the Ricardian model. * We formalize these ideas by constructing a one-factor Ricardian model using the following assumptions: Labor is the only factor of production (imagine two empty firms in which workers can go, sit, and produce). Labor productivity varies across countries due to differences in technology, but labor productivity in each country is constant. The supply of labor in each country is constant — no migration. Two goods: wine and cheese. Competition allows workers to be paid a “competitive” wage equal to the value of what they produce, and allows them to work in the industry that pays the highest wage (labor is freely mobile). 6. Two countries: home and foreign. *A unit labor requirement indicates the constant number of hours of labor required to produce one unit of output. — arc is the unit labor requirement for cheese in the home country. For example, ac = 1 means that 1 hour of labor produces one pound of cheese in the home country. — au is the unit labor requirement for wine in the home country. For example, a.w = 2 means that 2 hours of labor produces one gallon of wine in the home country. * A high unit labor requirement means low labor productivity. \ * Labor supply L indicates the total number of hours worked in the home country (a constant number). paWwNr * When the relative price of cheese equals the opportunity cost in the foreign country arc /ay< Pc /Py=a*Lc/a*uw — foreign workers are indifferent about producing wine or cheese (wage when producing wine same as wage when producing cheese). — domestic workers produce only cheese. * If the relative price of cheese rises above the opportunity cost of cheese in both countries arc/arw < a * rc /a* 1w < Pc/Pw, — nowine is produced. — home and foreign workers are willing to produce only cheese (where wage is higher) * World relative supply is a step function: — First step atrelative price of cheese equal to Home”s opportunity cost aLC /aLW, which equals 1/2 in the example. — Jumps when world relative supply of cheese equals Home” maximum cheese production divided by Foreign’s maximum wine production (L / aLC)/ (L*/a * LW), which equals 1 in the example. — Second step atrelative price of cheese equal to Foreign’s opportunity cost a * LC /a* LW, which equals 2 in the example. * Relative demand of cheese is the quantity of cheese demanded in all countries relative to the quantity of wine demanded in all countries. * As the price of cheese relative to the price of wine rises, consumers in all countries will tend to purchase less cheese and more wine so that the relative quantity demanded of cheese falls (a quick refresh of microeconomics...). Gains From Trade * Gains from trade come from specializing in the type of production Fig. 3-3: Wo rld Relative S u p ply a nd which uses resources most efficiently, and using the income generated D d from that production to buy the goods and services that countries desire. eman — where “using resources most efficiently” means producing a Rasa prise, 2 1 . Gi cheese, RAy good in which a country has a comparative advantage. * Domestic workers earn a higher income from cheese production because the relative price of cheese increases with trade. * Foreign workers eam a higher income from wine production because the TA 8 . è . 7 2 in ou” relative price of cheese decreases with trade (making cheese cheaper) and example) the relative price of wine increases with trade. * Think of trade as an indirect method of production that converts cheese into wine or vice versa. 2. 0/81w È so * Without trade, a country has to allocate resources to produce all of the Ca SE goods that it wants to consume. ___, | _. * With trade, a country can specialize its production and exchange for the ; Relative quantity mix of goods that it wants to consume. ofchesse, lt * Consumption possibilities expand beyond the production possibility frontier when trade is allowed. * With trade, consumption in each country is expanded because world production is expanded when each country specializes in producing the good in which it has a comparative advantage — production and consumption decoupled. Misconceptions About Comparative Advantage 1 Free irade is beneficial only if a country is more productive than foreign F ig. 3-4: Tra d e Expa n ds — But even an unproductive country benefits from free trade by avoiding . *hilj+; the high costs for goods that it would otherwise have to produce Con sum ptio n Possi bi I ities domestically. — High costs derive from inefficient use of resources. dana) Sa E — The benefits of free trade do not depend on absolute advantage, rather they depend on comparative advantage: specializing in industries that use resources most efficiently 2 Free trade withcountries that pay low wages hurts high wage countries. — Wnile trade may reduce wages for some workers, thereby affecting the distribution of income within a country, trade benefits consumers and other workers — distributional issues tackled in the next model... — Consumers benefit because they can purchase goods more cheaply. F — ProducersAworkers benefit by earning a higher income in the industries that use resources more efficiently, allowing them to eam higher prices Sirene CA Stone a; and wages. (a) Home (b) Foreign 3. Free trade exploits less productive countries. — While labor standards in some countries are less than exemplary compared to Western standards, they are so with or without trade. — Are high wages and safe labor practices alternatives to trade? Deeper poverty and exploitation (ex., involuntary prostitution) may result without export production. T e — Consumers benefit from free trade by having access to cheaply (efficiently) produced goods. — Producers/workers benefit from having higher profitsAvages—higher compared to the alternative. Comparative Advantage With Many Goods * Suppose now there are N goods produced, indexed by i=1,2,...N. * The home country ’s unit labor requirement for good i is a;;, and that of the foreign country is a*L; . * Goods will be produced wherever cheapest to produce them. * Let w represent the wage rate in the home country and w* represent the wage rate in the foreign country. — Ewan <w*a * then only the home country will produce good 1, since total wage payments are less there. — Or equivalently, if a*.: /a. > wAW* , if the relative productivity of a country in producing a good is higher than the relative wage, then the good will be produced in that country. * Suppose there are 5 goods produced in the world: apples, bananas, caviar, dates, and enchiladas. *Ifw/w* =3, the home country will produce apples, bananas, and caviar, while the foreign country will produce dates and enchiladas. — Therelative productivities of the home country in producing apples, bananas, and caviar are higher than the relative wage. * If each country specializes in goods that use resources productively and trades the products for those that it wants to consume, then each benefits. — If a country tries to produce all goods for itself, resources are “wasted”. * The home country has high productivity in apples, bananas, and caviar that give it a cost advantage, despite its high wage. * The foreign country has low wages that give it a cost advantage, despite its low productivity in date production. * How is the relative wage determined? * By the relative supply of and relative (derived) demand for labor services. * The relative (derived) demand for home labor services falls when w/w* rises. As domestic labor services become more expensive relative to foreign labor services, — goods produced in the home country become more expensive, and demand for these goods and the labor services to produce them falls. — fewer goods will be produced in the home country, further reducing the demand for domestic labor services. Suppose w/w* increases from 3 to 3.99: — The home country would produce apples, bananas, and caviar, but the demand for these goods and the labor to produce them would fall as the relative wage rises. * Suppose wAw* increases from 3.99 to 4.01: — Caviar is now too expensive to produce in the home country, so the caviar industry moves to the foreign country, causing a discrete (abrupt) drop in the demand for domestic labor services. * Consider similar effects as wAw* rises from 0.75 to 10. Fig. 3-5: Determination of Relative * Finally, suppose that relative supply of labor is independent of wAw* and is fixed at Relativo wage Wages an amount determined by the populations in the home and foreign countries. Transportation Costs and Nontraded Goods * The Ricardian model predicts that countries completely specialize in production. * But this rarely happens for three main reasons: 1. More than one factor of production reduces the tendency of specialization (Chapter 4). 2. Protectionism (Chapters 8-11). 3. Transportation costs reduce or prevent trade, which may cause each country to produce the same good or service. presta * Nontraded goods and services (ex., haircuts and auto repairs) exist due to high transport costs. — Countries tend to spend a large fraction of national income on nontraded goods and services. — This fact has implications for the gravity model and for models that consider how income transfers across countries affect trade. Empirical Evidence * Do countries export those goods in which their productivity is relatively high? Fig. 3-6: Productivity and Exports * The ratio of U.S. to British exports in 1951 compared to the ratio of U.S. to British labor productivity in 26 manufacturing industries suggests yes. * At this time the U.S. had an absolute advantage in all 26 industries, yet the ratio of exports was low in the least productive sectors of the U.S. * Compare Chinese output and productivity with that of Germany for various industries using 1995 data. — Chinese productivity (output per worker) was only 5 percent of Germany®s on average. 51 24 8 Naloo DE fin prc — Inapparel, Chinese productivity was about 20 percent of Germany”s, creating a strong comparative advantage in apparel for China. * The main implications of the Ricardian model are well supported by empirical evidence: — productivity differences play an important role in international trade — comparative advantage (not absolute advantage) matters for trade Summary 1. Differences in the productivity of labor across countries generate comparative advantage. 2. A country has a comparative advantage in producing a good when its opportunity cost of producing that good is lower than in other countries. 3. Countries export goods in which they have a comparative advantage - high productivity or low wages give countries a cost advantage. 4. With trade, the relative price settles in between what the relative prices were in each country before trade. 5. Trade benefits all countries due to the relative price of the exported good rising: income for workers who produce exports rises, and imported goods become less expensive. 6. Empirical evidence supports trade based on comparative advantage, although transportation costs and other factors prevent complete specialization in production. * CHAPTER4- Specific Factors and Income Distribution * If trade is so good for the economy, why is there such opposition? Two main reasons why international trade has strong effects on the distribution of income within a country: — Resources cannot move immediately or costlessly from one industry to another. — Industries differ in the factors of production they demand The specific factors model allows trade to affect income distribution. Assumptions of the model: — Two goods, cloth and food. — Three factors of production: labor (L), capital (K) and land (T for terrain). — Perfect competition prevails in all markets. — Cloth produced using capital and labor (but not land). — Foodproduced using land and labor (but not capital). -— Labor is a mobile factor that can move between sectors. — Landand capital are both specific factors used only in the production of one good. — (imagine workers that have to decide whether to go and work in the field or in the firm). * How much of each good does the economy produce? The production function (i.e. the recipe) for cloth gives the quantity of cloth that can be produced given any input of capital and labor: Qe= Qe (K, Le) Qc is the output of cloth , K is the capital stock, Lc is the labor force employed in cloth * The production fimction for food gives the quantity of food that can be produced given any input of land and labor: Qr= Qr (T, Lr) Qr is the output of food, T is the supply of land, Lr is the labor force employed in food Output, O, Production Possibilities How does the economy’s mix of output change as labor is shifted from one sector to the other? Qtà When labor moves from food to cloth, food production falls while output of cloth rises. Figure 4-1 illustrates the production function for cloth. * The shape of the production function reflects the law of diminishing marginal retums. — Adding one worker to the production process (without increasing the amount of capital/land) means that each worker has less capital/land to work with. — Therefore, each additional unit of labor adds less output than the last (imagine adding one by one = 100 farmers in a 1 m2 field!). input, Lo Marcinal product Figure 4-2 shows the marginal product of labor, which is the increase in output that corresponds to an ef'aber Melo extra unit of labor (i.e. the partial derivative of output with respect to labor, for a given level of K). *For the economy as a whole, the total labor employed in cloth and food must equal the total labor supply: Lc +L5=L Use these equations to derive the production possibilities frontier ofthe economy. * Use a four-quadrant diagram to construct production possil — Lower left quadrant indicates the allocation of labor. ities frontier in Figure 4-3. MP Labor input. Lo — Difficult/impossible test through utilities, but easy to think in terms of compensations — Without trade, the economy’s output of a good must equal its consumption. — International trade allows the mix of cloth and food consumed to differ from the mix produced. — The country cannot spend more than it eams: Po x De + Pr x De = Pcx Qe+Pr x Q Fig. 4-11: The Budget Constraint for a Trading Economy * The economy as a whole gains from trade. and Gains from Trade — It imports an amount of food equal to the relative price of cloth times the _ amount of cloth exported: tip ci ode ST Dr - Q5= (Pe /Pr) x (Qe- Dc) XI — Itisableto afford amounts of cloth and food that the country is not able to produce itself. — The budget constraint with trade lies above the production possil frontier in Figure 4-11. Baget conaraint Gone = Po/P; Income Distribution and the Gains from Trade 7 ° . 1 . \ * International trade shifts the relative price of cloth to food, so factor prices change. \ se * Trade benefits the factor that is specific to the export sector of each country, but a Gonsumpion ef hurts the factor that is specific to the import-competing sectors. duna * Trade has ambiguous effects on mobile factors. dll, QL * Trade benefits a country by expanding choices. — Possibleto redistribute income so that everyone gains from trade. — Those who gain from trade could compensate those who lose and still be better off themselves. — That everyone could gain from trade does not mean that they actually do — redistribution usually hard to implement. The Political Economy of Trade: A Preliminary View * Trade often produces losers as well as winners. * Optimal trade policy must weigh one group’s gain against another’s loss. — Some groups may need special treatment because they are already relatively poor (e.g., shoe and garment workers in the US) * Most economists strongly favor free trade. * Income Distribution and Trade Politics — Typically, those who gain from trade are a much less concentrated, informed, and organized group than those who lose. — Govemments usually provide a “safety net” of income support to cushion the losses to groups hurt by trade (or other changes). * Trade shifts jobs from import-competing to export sector. — Process not instantaneous — some workers will be unemployed as they look Figlia vieripiovimentani maporreneneuoà in for new jobs. eg. * How much unemployment can be traced back to trade? di Le n = = — From 1996 to 2008, only about 2.5% of involuntary displacements stemmed from import competition or plants moved overseas. 1 Md _ * Figure 4-12 shows that there is no obvious correlation between unemployment rate | 1 Ni ‘and imports relative to GDP for the U.S. to he TT — Unemployment is primarily a macroeconomic problem that rises during ° pesta rim bencaf] — The best way to reduce unemployment is by adopting macroeconomic policies to help the economy recover, not by adopting trade protection. Movements in Factors of Production * Movements in factors of production include — labor migration — thetransfer of financial assets through international borrowing and lending — transactions of multinational corporations involving direct ownership of foreign firms * Like movements of goods and services (trade), movements of factors of production are politically sensitive and are often restricted International Labor Mobility * Why does labor migrate and what effects does labor migration cause? Workers migrate to wherever wages are highest. Consider movement of labor across countries instead of across sectors. Suppose two countries produce one non-traded good (food) using two factors of production: — Land cannot move across countries but labor can. * Figure 4-13 finds the equilibrium wage and labor allocation with migration across countries. — Similar to how Figure 4-4 determined the equilibrium allocation of labor between sectors. * Start with OL' workers in Home eaming a lower real wage (point C) than the L'O* workers in Foreign (point B). — Lower wage due to less land per worker (lower productivity). * Workers in the home country want to migrate to the foreign country where they can eam more. * If no obstacles to labor migration exist, workers move from Home to Foreign until the purchasing power of wages is equal across countries (point A), with OL? workers in Home and L°O* workers in Foreign. — Emigration from Home decreases the supply of labor and raises real wage Fig 4-13: Causes and Effects of of the workers who remain there. * Workers who start in the Home country earn more due to emigration regardless if |nternati onal Labor Mobil ity they are among those who leave. — Immiggration into Foreign increases the supply of labor and decreases the Hel Me MAL real wage there. ì * Wages do not actually equalize, due to barriers to migration such as policies restricting immigration and natural reluctance to move. * Labor migration increases world output. — The value of foreign output rises by the area under its MPL* curve from L' mp Mei to L° — The value of domestic output falls by the area under its MPL curve from L° O Home 1 L' orign O toL! EMPOYMER alia EPPormen » na . tab om Home — World output rises because labor moves to where it is more productive to Foreign (Where wages are higher). Total word laber forco — The value ofworld output is maximized when the marginal productivity of labor is the same across countries. * Workers initially in Home benefit while workers in Foreign are hurt by inflows of other workers. — Landowners in Foreign gain from the inflow of workers decreasing real wages and increasing output. — Landowners in Home are hurt by the outflow of workers increasing real wages and decreasing output. * Does migration lead to the wage changes predicted? Table 4-1 shows that real wages in 1870 were much higher in destination countries than Real Wage, 1970 Vercentage Increase Dici 7 US. = 100) in Real Wage, 1870-1913 in origin countries. Desrinarion Cammirics Up until the eve of World War I in 1913, wages rose faster in origin countries than in i - destination countries (except Canada). È ui Migration moved the world toward more equalized wages. è & 8 2 * In the early 20th century, share of immigrants in the U.S. increased dramatically. so 5 5 — Vastimmigration from Eastem and Southem Europe. Fece nd ipa Palo Eronnte id 208) AIM * Tight restrictions on immigration imposed in the 1920s. — Immigrants were a minor force in the U.S. by the 19605. Fig. 4-14: Immigrants as a Percentage of the U.S. * New wave of immigration began around 1970. Population — Mostly from Latin America and Asia. *As of 2006, 15.3% of the U.S. labor force foreign-bom. Immigration and the U.S. Economy * The largest increase in recent immigration occurred among workers with the lowest education levels, making less educated workers more abundant. — possibly reduced wages for native-born workers with low education levels while raising wages for the more educated — wideningwage gap between less educated workers and highly educated workers. 1900 1910 1920 1030 1940 1950 1050 1070 1980 (€00 2000 Summary 1. International trade often has strong effects on the distribution of income within countries -- produces losers as well as winners. 2. Income distribution effects arise for two reasons: —Factors of production cannot move costlessly and quickly from one industry to another. - Changes in an economy’s output mix have differential effects on the demand for different factors of production. 3. International trade affects the distribution of income in the specific factors model. —Factors specific to export sectors in each country gain from trade, while factors specific to import-competing sectors lose. — Mobile factors that can work in either sector may either gain or lose. 4. Trade nonetheless produces overall gains in the sense that those who gain could in principle compensate those who lose while still remaining better off than before. 5. Most economists would prefer to address the problem of income distribution directly, rather than by restricting trade. 6. Those hurt by trade are often better organized than those who gain, causing trade restrictions to be adopted. 7. Labor migrates to countries with higher labor productivity and higher real wages, where labor is scarce. — Real wages fall due to immigration and rise due to emigration. — World output increases. 8. Real wages across countries are far from equal due to differences in technology and due to immigration barriers. *. CHAPTERS- Resources and Trade: The Heckscher-Ohlin Model In addition to differences in labor productivity, trade occurs due to differences in resources across countries. The Heckscher-Ohlin (HO) theory argues that trade occurs due to differences in labor, labor skills, physical capital, capital, or other factors of production across countries. — Countries have different relative abundance of factors of production. — Production processes use factors of production with different relative intensity. Important assumption: technology is the same across countries. HO model is useful in studying (technologically) similar countries where factors are mobile across sectors. Two Factor Heckscher-Ohlin Model 1. Two countries: home and foreign. 2. Two goods: cloth and food. 3. Two factors of production: labor (L) and capital (K). 4. The mix of labor and capital used varies across goods. 5. The supply of labor and capital in each country is constant and varies across countries. 6. In the long run, both labor and capital can move across sectors, equalizing their retums (wage and rental rate) across sectors. Production Possibilities With more than one factor of production, the opportunity cost in production is no longer constant and the PPF is no longer a straight line. Why? Numerical example: K = 3000, total amount of capital available for production L = 2000, total amount of labor available for production Suppose use a fixed mix (i.e. Leontief production function) of capital and labor in each sector. axc= 2, capital used to produce one yard of cloth arc = 2, labor used to produce one yard of cloth axe= 3, capital used to produce one calorie of food ae = 1, labor used to produce one calorie of food Production possibilities are influenced by both capital and labor. Let's look at how we can allocate the two factors in the two productions: _LkcAc + Agp £ K—_ A Capital used for Total yards of each calorie of cloth production food production 2 7 Total amount of capital resources Total calories of food production Capital used for each yard of cloth production “i mount of To a A+ AQ £ L labor resources Labor used for ‘each yard of cloth production Labor required for each calorie of food production Constraint on capital that capital used cannot exceed supply: 2Qc + 3Qr < 3000 Constraint on labor that labor used cannot exceed labor supply: 2Qc+ Q5 < 2000 * Economy must produce subject to both constraints — i. e., it must have enough capital and labor. * Without factor substitution, the production possibilities frontier is the interior of the two factor constraints. * Max food production 1000 (point 1) fully uses capital, with excess labor. * Max cloth 1000 (point 2) fully uses labor, with excess capital. * Intersection of labor and capital constraints occurs at 500 calories of food and 750 yards of cloth (point 3). * The opportunity cost of producing one more yard of cloth, in terms of food, is not Fig. 5-1: The Production Possibility Frontier Without constant: — low (2/3 in example) when the economy produces a low amount of cloth and Factor Substitution a high amount of food — high (2 in example) when the economy produces a high amount auantiy et tocd, 0, of cloth and a low amount of food * Why? Because when the economy devotes more resources towards production of one ;om good, the marginal productivity of those resources tends to be low so that the opportunity cost is high. Labor constrain: slope=-2 Production possibili fronti: I ‘epperiunity Cost oi cletn in lorme al lood Capital constraint lope= 2/8 250 1,000 1,500 1,000 * The above PPF equations do not allow substitution of capital for labor in production. — Unit factor requirements are constant along each line segment of the PPE * If producers can substitute one input for another in the production process, then the PPF is curved (bowed). — Opportunity cost of cloth increases as producers make more cloth. 500 What does the country produce? The economy produces at the point that maximizes the value of production, V. An isovalue line is a line representing a constant value of production, V: V=PcQe+tPrQr * Relative prices and the pattern of trade: In Home, the rise in the relative price of cloth leads to a rise in the relative production of cloth and a fall in relative consumption of cloth. — Home becomes an exporter of cloth and an importer of food. * The decline in the relative price of cloth in Foreign leads it to become an importer of cloth and an exporter of food. * Heckscher-Ohlin theorem: An econoniy has a comparative advantage in producing, and thus will export, goods that are relatively intensive in using its relatively abundant factors of production, — and will import goods that are relatively intensive in using its relatively scarce factors of production. Factor Price Equalization * Unlike the Ricardian model, the Heckscher-Ohlin model predicts that factor prices will be equalized among countries that trade. * Free trade equalizes relative output prices. * Due to the connection between output prices and factor prices, factor prices are also equalized. * Trade increases the demand of goods produced by relatively abundant factors, indirectly increasing the demand of these factors, raising the prices of the relatively abundant factors. * In the real world, factor prices are not equal across countries. * The model assumes that trading countries produce the same goods, but countries may produce different goods if their factor ratios radically differ. * The model also assumes that trading countries have the same technology, but different technologies could affect the productivities of factors and therefore the wages/rates paid to these factors. * The model also ignores trade barriers and transportation costs, which may prevent output prices and thus factor prices from equalizing. * The model predicts outcomes for the long run (after factors reallocate across industries), but after an economy liberalizes trade, factors of Table 5-1: Comparative International Wage Rates (United States = 100) Comparative International Wage Rates (United States = 100) production may not quickly move to the industries that intensively use Houriy Compensation — abundant factors. Cron e Prin ken 205 — In the short run, the productivity of factors will be determined by their use | Germany 140 i i È ; Jopon o in their current industry, so that their wage/rental rate may vary across | span pri countries. Senti Fovea ® Does Trade Increase Income Inequality? Me i Over the last 40 years, countries like South Korea, Mexico, and China have 22004 exported to the U.S. goods intensive in unskilled labor (ex., clothing, shoes, | | Seurve: buresv otLatior sisistc, rovotga Lotior srasistee Ho toys, assembled goods). At the same time, income inequality has increased in the U.S., as wages of unskilled workers have grown slowly compared to those of skilled workers. Did the former trend cause the latter trend? The Heckscher-Ohlin model predicts that owners of relatively abundant factors will gain from trade and owners of relatively scarce factors will lose from trade. — Little evidence supporting this prediction exists. 1. According to the model, a change in the distribution of income occurs through changes in output prices, but there is no evidence of a change in the prices of skill-intensive goods relative to prices of unskilled-intensive goods. 2. According to the model, wages of unskilled workers should increase in unskilled labor abundant countries relative to wages of skilled labor, but in some cases the reverse has occurred: — Wages of skilled labor have increased more rapidly in Mexico than wages of unskilled labor. But compared to the U.S. and Canada, Mexico is supposed to be abundant in unskilled workers. 3. Even if the model were exactly correct, trade is a small fraction of the U.S. economy, so its effects on U.S. prices and wages prices should be small. Trade and Income Distribution Changes in income distribution occur with every economic change, not only international trade. — Changes in technology (IT revolution), changes in consumer preferences (taste for iPad), exhaustion of resources (sulfur in Sicily) and discovery of new ones (gas in Basilicata) all affect income distribution. — Economists put most of the blame on technological change and the resulting premium paid on education as the major cause of Fig. 5-11: Evolution of U.S. Non-Production-Production Employment Ratios in. Increased Wage Inequality: Trade or Skill-Biased increasing income inequality in the Eott:Gra ps /ESECioR Technological Change? (cont.) US (see below). i It would be better to compensate the Sn geme agi, losers from trade (or any economic change) than prohibit trade. - The economy as a whole does benefit from trade. > Sio © Suzi, uns LLELLELILLEL smpiovmen de (b) Effects of skdil-blased technologioni change There is a political bias in trade politics: potential losers from trade are better politically organized than the winners from trade. — Lossesare usually concentrated among a few, but gains are usually dispersed among many. — Eachamerican pays about $8/year to restrict imports of sugar, and the total cost of this policy is about $2 billion/year. — Thebenefits of this program total about $1 billion, but this amount goes to relatively few sugar producers. Empirical Evidence on the Heckscher-Ohlin Model * Tests on US data — Leontief found that U.S. exports were less capitalintensive than U.S. imports, even though the U.S. is the most capital-abundant country in the world: Leontief paradox. * Tests on global data — Bowen, Leamer, and Sveikauskas tested the Heckscher-Ohlin model on data from 27 countries and confirmed the Leontief paradox on an intemational level. Table 5-2: Factor Content of U.S. Exports and Imports for 1962 Table 5-3: Testing the Heckscher- Ohlin Model Testing he Heckscher-Ohlin Model! Factor of Productton Prediciive Success® Capi ns Licor 06 Factor Content of U.S. Exports and Imports for 1962 Professional workers 078 De Imports Exporis da Capital per milion dollars 52.132.000 81876000 var Labor (person- years) per million dlars 19 131 Ha Capi cars per worker} $17916 SII sn ofeducation per worker 99 Di sai Proportion of engineers and scientists in work force 00189 0.0255 070 Baldwin, “Determinante ofthe Commedity Structure of U.S. Trade” Americon Economie TApnrni serene Pea er prada i 970 pp 120-185 ey Bo ir Loc iL tai i VT * Because the Heckscher-Ohlin model predicts that factor prices will be equalized across trading countries, it also predicts that factors of production will produce and export a certain quantity goods until factor prices are equalized. — In other words, a predicted value of services from factors of production will be embodied in a predicted volume of trade between countries. Table 5-4: Estimated Technological Efficiency, 1983 * But because factor prices are not equalized across countries, the predicted (United States = 1) volume of trade is much larger than actually occurs. — Aresult of “missing trade” discovered by Daniel Trefler. Estimated Technological Eficiency, 1983 (United States = 1) * The reason for this “missing trade” appears to be the assumption of identical technology among countries. — Technology affects the productivity of workers and therefore the value of labor services. 00 Qa7 040 Japan 070 West German 078 Te Carso the Missing Te ani Orber Myseic<" Americam Pronamio Revien ) pp. 1029-1046. A country with high technology and a high value of labor services would not necessarily import a lot from a country with low technology and a low value of labor services. * Looking at changes in patterns of exports between developed (high income) and developing (low/middle income) countries supports the theory. * US imports from Bangladesh are highest in low-skill-intensity industries, while Fi-544% Ski intensity ondibe Patten of U.S. Imports US imports from Germany are highest in high- skillintensity industries. from Two Countries * As Japan and the four Asian “miracle” countries became more skill-abundant, Biintamy tee USimpone Semanoa share o DA TE U.S. imports from these countries shifted from less skill-intensive industries na par toward more skillintensive industries. io S | Fig. 5- Share of U.S.imporis by industry 22 tot) fimgad Got) nos ato cs od e css od 31 mons ' rcuary 13: Changing Patterns of Comparative Advantage Fig. 5-13: Changing si Comparative Advantage cont. FS. impor by Industry 20 22 22 sa 20 20 20 18 18 a Four mradice ba 1a Z i Eri TT È as C os Led EE ZE Wisstem Europe ost cs iL os — | sé pon da 04 024 1908 02 oa so qa co non aîo oo al cl s3 08 ca 505 aio als so oss olo c6 c@ --- Si imersiy fit Ski intensi of indsty gra nane: [tr @io | Summary 1. Substitution of factors used in the production process generates a curved PPF. — When an economy produces a low quantity of a good, the opportunity cost of producing that good is low. — When an economy produces a high quantity of a good, the opportunity cost of producing that good is high. 2. When an economy produces the most value it can from its resources, the opportunity cost of producing a good equals the relative price of that good in markets. 3. An increase in the relative price of a good causes the real wage or real rental rate of the factor used intensively in the production of that good to increase, — while the real wage and real rental rates of other factors of production decrease. 4. If output prices remain constant as the amount of a factor of production increases, then the supply of the good that uses this factor intensively increases, and the supply of the other good decreases. 5. An economy exports goods that are relatively intensive in its relatively abundant factors of production and imports goods that are relatively intensive in its relatively scarce factors of production. 6. Owners of abundant factors gain, while owners of scarce factors lose with trade. 7. A country as awhole is predicted to be better off with trade, so winners could in theory compensate the losers within each country. 8. The Heckscher-Ohlin model predicts that relative output prices and factor prices will equalize, neither of which occurs in the real world. 9. Empirical support of the Heckscher-Ohlin model is weak except for cases involving trade between high-income countries and low/middle- income countries or when technology differences are included. Chapter 7: External Economies of Scale and the International Location of Production * Notice that we are increasingly zooming in the int’l trade issue: from countries (Ricardo), to sectors (spec.fact., HO), now we move toward firms * Imagine that Thailand could make watches more cheaply, but Switzerland got there first. * The price of watches could be lower in Thailand with no trade. * Trade could make Thailand worse off, creating an incentive to protect its potential watch industry from foreign competition. * What if Thailand reverts to autarky? Fig. 7-5: External Economies and Losses from Trade * Note that it's still to the benefit of the world economy to take advantage of the gains from concentrating industries. * Each country wanting to reap the benefits of housing an industry with economies of scale creates trade conflicts. * Overall, it's better for the world that each industry with extemal economies be concentrated somewhere. Price, cost (per watch} \ Open economy Closed economy Dynamic Increasing Returns * So far, we have considered cases where external economies depend on the amount of current output at a point in time. * But external economies may also depend on the amount of cumulative output over time. Dynamic increasing returns to scale exist if average costs fall as cumulative output over time rises. Quanti ol watches - Dynamic increasing retums to scale imply dynamic external economies of scale produoed end demanded AGG ‘8418 _ Open economy with Thai first ri * Dynamic increasing retums to scale could arise if the cost of production depends on the accumulation of knowledge and experience, which depend on the production process over time. A graphical representation of dynamic increasing retums to scale is called a leaming curve. Fig. 7-6: The Learn ing Gana * Like external economies of scale at a point in time, dynamic increasing retums to scale can lock in an initial advantage or a head start in an industry. Unit cost * Can also be used to justify protectionism. — Temporary protection of industries enables them to gain experience: infant industry argument. — But temporary is often for a long time, and it is hard to identify when external economies of scale really exist. International Trade and Economic Geography * External economies may also be important for interregional trade within a country. — Many movie producers located in Los Angeles produce movies for consumers throughout the U.S. — Many financial firms located in New York provide financial services for consumers throughout the U.S. * Some nontradable goods like veterinary services must usually be supplied locally. * If external economies exist, the pattern of trade may be due to historical accidents: — Regions that start as large producers in certain industries tend to remain large producers even if another region could potentially produce more cheaply. Table 7-2: Some Examples of Tradable and Nontradable Industries Some Examples of Tradable and Nontradable Industries Tradable Industries Nontradable Industries Motion pictures Newspaper publishers Securities, commodities, etc. Savings institutions Scientific research Veterinary services Source: J. Bradford Jensen and Lori. G. Kletzer, “Tr and Impact of Services Outsourcing.” in Lael Brainar Trade Forum 2005: Offshoring White Collar Work (Was 2005), pp. 75-116. es: Understanding the Scope n M. Collins, eds., Brookings 10n, D.C.: Brockings Institution, * More broadly, economic geography refers to the study of international trade, interregional trade and the organization of economic activity in metropolitan and rural areas. — Economic geography studies how humans transact with each other across space. * Communication changes such as the Internet, e-mail, text mail, video conferencing, mobile phones (as well as modern transportation) are changing how humans transact with each other across space. Summary 1. Trade need not be the result of comparative advantage. Instead, it can result from increasing retums or economies of scale, that is, from a tendency of unit costs to be lower with larger output. 2. Economies of scale give countries an incentive to specialize and trade even in the absence of differences in resources or technology between countries. 3. Economies of scale can be intemal (depending on the size of the firm) or extemal (depending on the size of the industry). 4. Economies of scale can lead to a breakdown of perfect competition, unless they take the form of external economies, which occur at the level of the industry instead of the firm. 5. External economies give an important role to history and accident in determining the pattern of international trade. When external economies are important, a country starting with a large advantage may retain that advantage even if another country could potentially produce the same goods more cheaply. 6. When external economies are important, countries can conceivably lose from trade. Also the free trade price can fall below the price before trade in both countries. 7. Economic geography refers to how humans transact with each other across space, including through international trade and interregional trade. 8. Trade based on extemal economies of scale may increase or decrease national welfare, and countries may benefit from temporary protectionism if their industries exhibit external economies of scale either at a point in time or over time. *. Chapter 8: Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises * When economies of scale exist, large firms may be more efficient than small firms, and the industry may consist of a monopoly or a few large firms. — Production may be imperfectly competitive in the sense that excess or monopoly profits are captured by large firms. * Internal economies of scale result when large firms have a cost advantage over small firms, causing the industry to become uncompetitive. * Internal economies of scale imply that a firms average cost of production decreases the more output it produces. * Perfect competition that drives the price of a good down to marginal cost would imply losses for those firms because they would not be able to recover the higher costs incurred from producing the initial units of output. *Asa result, perfect competition would force those firms out of the market. * In most sectors, (1) goods are differentiated from each other and there are other differences across firms. * Integration causes the (2) better-performing firms to flourish and expand, while the worse-performing firms contract. * Additional source of gain from trade: As production is concentrated toward better-performing firms, the overall efficiency of the industry improves. * Study why those better-performing firms have a greater incentive to engage in the global economy. The Theory of Imperfect Competition * In imperfect competition, firms are aware that they can influence the prices of their products and that they can sell more only by reducing their price (case of Boeing vs Airbus). * This situation occurs (i) when there are only a few major producers of a particular good or (ii) when each firm produces a good that is differentiated from that of rival firms. * Each firm views itself as a price setter, choosing the price of its product. Monopoly: A Brief Review * A monopoly is an industry with only one firm. * An oligopoly is an industry with only a few firms. * In these industries, the marginal revenue generated from selling more products is less than the uniform price charged for each product. — To sell more, a firm must lower the price of all units, not just the additional ones. The marginal revenue function therefore lies below the demand function (which determines the price that customers are willing to pay). > wedge between price and marginal cost . . Lu Fig. 8-2: Average Versus Marginal Cost * Assume that the demand curve the firm faces is a straight line Q=A- BP, where Q is the number of units the firm sells, P the Cost per unit price per unit, and A and B are constants. 6 + Marginal revenue equals MR = P— (Q/B): Î 4 Formally, inverting Q(P) above gives P=(A/B) -(Q/B1, so revenues are P{aja = (AQ/8)-(0°/8) and marginal revenues are its derivative wrt Qi - (0? 2 Average cost 20/8) — (04/8) _ 148). 2(a/8)=(4/8) - (0/8) - (Q/8)= P- (0/8) i _ argina! * Suppose that total costs are C = F + cQ, where F is fixed costs, += 2/4 6 8 10 12 14 16 18 20 22 24 those independent of the level of output, and cis the constant marginal cost. Average cost is the cost of production (C) divided by the total quantity of production (Q). AC =C/Q=F/Q+c Marginal cost is the cost of producing an additional unit of output. A larger firm is more efficient because average cost decreases as output Q increases: internal economies of scale. Output . . Fig. 8-1: Monopolistic Pricing and Production Decisions * The profit-maximizing output occurs where marginal revenue equals marginal cost. — At the intersection of the MC and MR curves, the revenue gained from selling an extra unit dani equals the cost of producing that unit. MELE * The monopolist eams some monopoly profits, as indicated by the shaded box, when P> AC Monopolistic Competition nonopoly profis * Monopolistic competition is a simple model of an imperfectly competitive industry that assumes that each firm 1. can differentiate its product from the product of competitors, and 2. takesthe prices charged by its rivals as given. “A firm in a monopolistically competitive industry is expected to sell da Rentao: — moreas total sales in the industry increase and as prices charged by rivals increase. — less asthenumber of firms in the industry increases and as the finrm’s price increases. * These concepts are represented by the function: Q = S[l/n-bP-P)] -Q is an individual firm’s sales — Sisthetotal sales of the industry — nisthe number of firms in the industry — bisa constant termrepresenting the responsiveness of a firm’s sales to its price — Pistheprice charged by the firm itself — Pisthe average price charged by its competitors (con la barra sopra) * Assume that firms are symmetric: all firms face the same demand function and have the same cost function. — Thusall firms should charge the same price and have equal share of the market Q = S/n — — Average costs should depend on the size of the market and the number of firms: AC=C/Q=F/Q+c=nF/S+c ACEn(F/S)+c *As the number of firms n in the industry increases, the average cost increases for each firm because each produces less. CC curve. * As total sales S of the industry increase, the average cost decreases for each firm because each produces more. * If monopolistic firms face linear demand functions, Q = A — BP, — where A and B are constants. * When firms maximize profits, they should produce until marginal revenue equals marginal cost: MR=P—Q/B=c * In this case, B=Sb, and given the equilibrium condition (i.e. P=P) Q/S=1/n, we can write: P=c+1/bn + PP curve *As the number of firms n in the industry increases, the price that each firm charges decreases because of increased competition. . . . Fig. 8-3: Equilibrium in a Monopolistically Competitive * At some number of firms, the price that firms charge (which decreases in n) matches the Market average cost that firms pay (which increases in n). — At this long-run equilibrium number of firms in the industry, firms have no qercan incentive to enter or exit the industry. * If the number of firms is greater than or less than the equilibrium number, then firms have an incentive to exit or enter the industry. — Firmshave an incentive to exit the industry when price < average cost. — Firmshave an incentive to enter the industry when price > average cost. Monopolistic Competition and Trade * Because trade increases market size (S), trade is predicted to decrease average cost in an industry described by monopolistic competition. — Industry sales increase with trade leading to decreased average costs: OR So Mme ACEn(F/S)+c * Because trade increases the variety of goods that consumers can buy under monopolistic competition, it increases the welfare of consumers. Fig. 8-4: Effects of a La rger Market — And because average costs decrease, consumers can also benefit from a decreased price. * As a result of trade, the number of firms in a new international industry is predicted to increase relative to each national market. — Butitis unclear if firms will locate in the domestic country or foreign countries. * Integrating markets through intemational trade therefore has the same effects as growth of a market within a single country. * Product differentiation and internal economies of scale lead to trade between similar countries with no comparative advantage differences between them. 6. Dumping may be a profitable strategy when a firm faces little competition in its domestic market and faces heavy competition in foreign markets. 7. Multinationals are typically larger and more productive than exporters, which in tum are larger and more efficient than firms that sell only to the domestic market. 8. Multinational corporations undertake foreign direct investment when proximity is more important than concentrating production in one location. — Firms produce where it is most cost-effective — abroad if the scale is large enough. They replicate entire production process abroad or locate stages in different countries. — Firms also decide whether to keep transactions within the firm or contract with another firm PART 2 * South-North undocumented migrations Some facts and projections * South-North migration, in particular Africa-Europe, will be a sizeable long-run phenomenon for current and next generations + address it, not dismiss, forget, or blame! * Push forces (in the South): demography (high fertility rates, better health, increased life expectancy), low wages, conflicts, climate change * Pull forces (in the North): demography @opulation aging, lack of young contributors for pensions), high wages, peace Hanson and McIntosh (JEP 2016) use a gravity model to predict migration into OECD countries * US stabilizes, as older Mexicans are replaced, plus Mexico shows now lower fertility than before * Spain and Italy are attractive because of vicinity, UK for wages * Germany head started with Turkish, now with lower fertility and increasing (?) wages Borders: changing incentives for migrants All this numbers and estimates assume relatively free mobility, what about increasing costs of migration? Especially after the economic crises, moving is harder and harder (no quotas, difficult visas, etc.), so people try to migrate through illegal and risky channels, i.e. exploiting the smugglers’ market... Illegal migration: is people sensitive? * We want to evaluate whether and how much people react to the availability of smugglers, as it is very important for policy design! * But we have to clean from everything else that is happening at the same time (push/pull effects, pairwise linkages) * Focus on Central Mediterranean Route vs other routes AND before vs after the Arab Spring + Differences-in-Differences design to estimate the causal effect ofthe opening of the Central Mediterranean Route on people’s Willingness to Migrate (from Gallup World Poll) Empirical strategy: regression primer * Regression line: find the line nyperplane) that better fits the data by minimizing the distance between the observations and the line itself * Ifwe can't say that slope is zero (usually stars “*” are used), we are happy © and we have found a regularity between two variables Conclusions » Shorter migration distance along smuggling routes (i.e. lower costs) signiticantly increases migration intentions: back-ot-the-envelope calculation delivers 210K migrants because of opening of CMR » Shorter distances increase the willingness to migrate especially for young, (medium) skilled individuals and those with a close network abroad. This is also true among crigin countries close to the CMR and those with weaker Rule of Law Trade, geography, and the unifying force of Islam * Who cares? — Economic history (at large) is interesting per se, but...understanding mechanisms not yet discovered changes the way we think about todays issues — Specifically, we cannot think of studying the effect of adopting a religion on some economic outcomes (Barro McLeary) if we fail to understend that part of the story is the other way round: economy — religion Agricultura! g0eds * Why should an Intl Econ student care? — Trade is key in Islam for at least three different aspects: 1. Was a needful option for survival in places such as Arabia 2. Triggered the adoption of specific economic institutions (i.e. Islam) 3. Helped the spread of Islam around the world PPF agriculturalists * A very diverse environment creates differentiation in production — Agriculturalists — Subsistence level Bedouins — Ricardian world, so gains from trade are there. But markets were far from being perfect, — » Animals not obvious trade would had emerged * Important ingredient: need of suvival — Bedouins needed agricultural goods not to die Agricultural goods Subsistence level circhi * In diverse environment local trade was essential to survive — if a religion/polity had to —_ 7 Animals.‘ 1mify diverse places, it should have some comparative advantages in trade * Ok, but... this was true since centuries before Muhammad! — The attitude to trade was only a necessary condition for Islam to emerge * Why everything changed (i.e. Birth and huge spread of Islam) around VII century? * Let's see what happened around 500 AD... Long-distance trade, i.e. East-West trade between Europe and rest of the World, took place along the Turkey-Iran-India path Trade as a triggered for the adoption of specific economic institutions * Massive wars between Byzantines and Persians in 503 AD * Long-distance trade routes diverted South through Arabia: new Turkey-Arabia-Iran-India path So what? — Massive gains from trade from long-distance trade, but just for some... People living in and around oases, i.e. agriculturalists, gained the most because of localized external economies of scale * Around cases local market transformed into lively cities, with huge positive externalities coming from agglomeration (Until 1700 largest cities in the West were Constantinolope, Baghdad or Cairo) * But agriculturalist were few! The many bedouins around were not gaining anything out from longdistance trade * (If beduins were few, no need for all this analysis!) * Tensions between the two parties — First, borrow simple redistributive institutions (i.e. zakat) from societies around and keep bedouins calm by redistributing some gains to them. Tried for a century, but it didn't work... * Why redistribution didn't work? * Given the nature of long-distance trade, it was always better for bedouins to first accept the transfers from the rich agriculturalists and then fight to extract more — a Pareto efficient solution that is not Nash equilibrium * Prophet Mohammed's intuition: — Propose institutions, i.e. our markers for Islam, able to dynamically redistribute resources to all the society — Make these institutions incentive compatible: in case of bedouin's deviation from equilibrium, _} there would have been punishment x — Having large gains from trade is a necessary condition for incentive compati! e * Islamic institutions: — Wagf: investments in public goods to the benefit of the society (education, wells, water Ethnic Groups in Ethiopia sanitation, etc.) onbelard ol he Ambaric Cicero » 1% Mii in 2005 — Equitable inheritance rules — Multiple wives — ... — All of these show dynamic redistribution ‘omalard of the Somel! Group - 100% Mueli in 2506 * What we have discovered: — Unequal places foster the development of trade attitude (comparative advantage in trading activity) — However, the availability of long-distance trade, in the context of unequal places (few rich and È many poor people) also creates tensions because of gains going locally to rich, due to external ; # economies of scale — Needfora set of institutions able to unify contrasting interests — Islam — Islam is bom with a comparative advantage in trade thanks to its diverse environment ...and later on... Regional Land Quality for Agriculture — Islamic traders at the four comers of the world ci passi + Bring the theory to the data * We expect Islam to be more represented in places — More agriculturally unequal — Closetotrade routes — More agriculturally unequal & Close to trade routes * So let's measure... * Share of Muslim in a given area in 2000 (here ethnic group, but we do for countries and virtual countries, t00) * Inequality in agricultural endowment: Gini index of agricultural productivity in a given area, with productivity measured at the pixel level Empirical analysis Methodology: regression analysis %Muslim=al*Ineqta2*Distta3*Ineq*Dist+... Where «...» are country dummies, other controls and an error term Share of Mugim Share of Muslim Regression ine Regression ine Distance to > Land inequality trade routes Concluding... * Shown a theory about the massive importance of trade for the development of ‘ a Islam(ic institutions) * Important to prove (or disprove) the theories one have in mind [Hint on interaction term: calculate the derivative of %Muslim with respect to inequality] * Lesson 1 - GLOBALIZATION: DEFINITION, HISTORICAL WAVES AND RECENT TRENDS Process of increasing integration / interconnection of national economies, which takes place on three dimensions / phenomena: 1) Trade of goods and services (goods and services market) 2) Investment flows (capital market) 3) Migration flows (labour market) * Non-linear, non-irreversible process — Interruption in the XX century, between the two world wars — 1990s: the collapse of the USSR gave birth to many states, with their own currency and trade policies, which opened to economic relationships with other countries — Latest years: slowdown (due to protectionism and other causes) and pandemic * Different types of drivers: technological (transport, ICTs), regulatory (trade policies), geopolitics, etc. ... with different weight in the history = Complex and changing geography at the global scale (changing geographical hierarchy) Historical waves (Lindert and Williamson, 2001): » First wave: 1820 — 1914 = Second wave : 1950 — 2000 Main drivers in the two waves 1) Improvement of transpoit & logistics infrastructure and services, thanks to technological progress and innovation —> Reduction of transport costs (trade costs) — Increase in trade and mobility of people 2) Changes in trade policy / Trade liberalization: reduction’'removal of (tariff and non-tariff) barriers (e.g., duties) to international trade, capital movement, movement of people — Increase in trade, mobility of people and capital (FDI) or the make the processes more and more efficient or they aim to improve products in terms of quality, innovation, range, design the ultimate goal is to increase competitiveness — profit maximization Multinational companies invest in countries which offer locational advantages that meet their strategic goals. The locational advantages of the host countries are crucial pull factors. existance of a large market — attracts FDIs — because they can reduce certain costs of access to that market, there are high trade costs, and low fixed plant costs proximity-concentration trade off: trade off between per unit export cost t and fixed cost F of setting up an additional production facility Assume that the company sells Q in the foreign market > Total trade costs = Q x t Q<Ft Ton Exportingis more La, The company wil expensive invest abroad Exporting is less mi» The company will not ‘expensive invest abroad the more you invest abroad, the less you are concentrated market seeking FDI occurs mainly between developed countries but they may be attracted by developing countries if with large demographic and potential growth export platform FDI: market seeking FDI intended to serve not only the host country s market but also the larger foreign markets in the region of the world where the host country is located. Usually occur in countries inside free-trade areas efficiency seeking FDI — low cost labor — invest in countries where the cost of labor is very low-mostly developing countries dilemma between the high differences in labor cost between the home country and the host country and the low fixed plant costs proximity-concentration trade off: trade off between cost differences and fixed plant costs of setting up an additional production facility overseas strategic asset-seeking FDI — multinational companies are driven by the goal to acquire a strategic asset: like labor, quality, innovation market seeking FDI — setting up in a large foreign market to reduce costs of access to the market Third lesson resource seeking FDI — getting the control over the supply of raw materials — reducing the costs associated to the lack of control/ownership for example agricultural firms acquired by multinational food companies example: ikea bought a lot of forest in Romania = getting control in raw materials transport accessibility — companies look for accessible places, close to important transport and logistics nodes — to reduce transportation costs and personnel the netherlands provides access to 95% of Europe's most lucrative consumer markets availability of ICT ifrastructure and services —> multinational companies are interested in locating close to places well connected at the international scale — meaning broadband, 5G ecc presence of R&D activities and innovative capacity — research&development — they want to locate where there's innovative capacity so they can benefit from: knowledge transfer, collaborations, wide pool of high qualified specialized skills Agglomeration economies areas with large firms and population agglomerations, where they can take advantage of wide and varied range of external economies --- which enhances efficiency and productivity proximity to suppliers and customers, knowledge spillover and industrial atmosphere availability of services and infrastructu, human resources, skilled labor agglomeration of foreign companies in a country solves problems related to information assymetry, inducing imitative behaviour Existance of a favourable institutional and regulatory environment security — absence of organized crime efficiency of public administration — efficient bureaucracy reduces operating costs and reduces uncertainty — legal system and protection of property rights — makes country more attractive if private property rights are ok — ‘adequate labor market laws and regulation — worker protection regulation, collective bargaining mechanisms, labor income tax wedge Special economic zones SEZs — areas with economic legislation different from that at national level — in these areas it's possible to derogate from the laws in force FDI effects on the country of destination — Greenfield FDI - output: net increase in the total stock ofinvestments in the country of destination - income effects: increase in output and income — Brownfield FDI - output: investors take control of the company based in the host country and can make new additional investments - income effects: multinationals pay on avarage higher wages than domestic companies Employment effects — quantitative terms — increase in n of jobs — qualitative terms — FDI have a higher skill intensity — multinational companies recruit workers who on avarage have higher level of qualifications / skills than domestic companies — multinationals are more likely to provide training opportunities to their workforce Effects on competiton — multinationals cause supply increase and higher competitiveness on the internal market = price reduction = greater well being for consumers — increase in competitive pressure = local companies are pushed towards greater efficiency and productivity Variety effects — increase in consumer well being — from the variety of products Incentive to improve the socio-economic and institutional environment — as FDI are attracted by countries with low level of comuption, good infrastructure, high education — they stimulate indirectly the host countries to make reforms Linkage effects — upstream domestic companies can find new customers in multinational companies = new domestic companies into industry — multinationals that invest in a foreign country can bring with them their suppliers — suppliers follow their customers = domestic companies can take advantage of new suppliers in their country Knowledge spillover effects — multinationals spend in research and development more than domestic companies — linkages with multinational companies = likelyhood of knowledge spillovers — technology transfer — domestic firms learn from multinational companies + they increase their productivity and competitiveness Tax revenues — national governments often use tax breaks to attract FDIs — iftheywork they increase the tax base = positive effect on tax revenues — increase in hard cumrency reserves, if foreign owned firms export Negative effects — profit shifting out of host countries — risk of closure or downsizing of strategic activities like R&D — lower profits for the national firms, due to competition with multinationals, smaller market share, increased competition for skiller workers — loss of control over strategic companies — foreign owned banks might be less likely to lend to local businesses — acquisition of asset causing population impoverislument effect — land grabbing FDI effects on the country of origin — risk ofloss of production of essential products — loss of self sufficiency in important sectors — offshoring— relocation of a stage ofthe production chain overseas — can cause net output and job losses in the short term. However long term there may be positive effects in terms of employment + increased competitiveness Facts and figures — Italy hasalow ability of attracting FDIS, 16% position — if we compare to other countries, like UK France Germany Spain, Italy is the last one — inItaly Greenfield FDIs on the decrease, almost 0. almost all ofthem are Brownfield FDIs — what sectors attract more FDIs in Italy? Machinery, cars, machinery, etc — 40% manufactoring, 1/3 trade — the most important countries that invest in Italy are Germany — almost 40%, France and UK. Also increasing from Asia — FDlsinitaly are mostly market oriented and strategic assets seeking FDI — FDlsare better performing than domestic companies Does Italy have locational disadvantages/advantages? — most ofthe main locational advantages are poorly presented in italy — unique negative factors: organized crime — macro-area factor, which negatively affects Italy's attractiveness Changes in the nature and geography of trade flaws — untilthe 19808 intemational trade had a simple structure (few goods) and simple geography — vertically integrated manufacturing companies in developed countries, carrying out the entire production in the same place and expoiting finished products overseas developing countries specialized and exporting in primary sectors like agriculture — commodities from poor countries to rich countries, manufacturing products between rich countries or from rich to poor countries no international trade flaws of intermediate goods, parts components. Only commodities and raw materials Since the 1990s the structure of international trade became more complex due to GVCs — multinationals broke up internationally the production chains in search for the best locational advantages — increase in the trade of intermediate goods ecc higher complexity of geographical/directional intemational trade — not only north south but also south south, north north developing economies grew up, diversifying their economy — they export not only commodities but also manufacturing products, services to developed countries Global Value Chain GVC — all activities/ stages of the production process which lead to the realization of a product and its sale to the end-users, staiting from the initial stages up to its distribution to the final market, addin value at each stage [[inputs {Componente [Fine produet}ò (ras ](veson ) (“init ) (Logistica ](1arcoino) (Dtm ] > Upstream Middie-end Downstream A value chain becomes global when many stages (at least 2) are located in foreign countries i î i Modular lsletionai Capivi ferar Domestic Value Chain —Sequential GVC Ray GVC te TR Pr End Use! Customers Lead Lead Integrated firm firm poni Firm n. P Q A X_n $ ù < sò Tum- [Relaticnal Key suppier Geographiesiy concentratad Geographicaly dispersed vate Geographicaly ispersed value carrera coro Serene Sarno tate Ù dù cs localizes e production stages n’ localizes the production stages In localizes the production stages in produci lo diher counties Sequentaly, In c0ch county, Each productive uni located in a Supplies L ii ‘omponeni Component — Gao rane nicole dae SENO Pi and gt! Sn gini - CApme, autput af each unit is the input of assembly unit placed in another ‘suppliers suppliers pe the Upperevel unit n îhe value country. The output ol each Sbagg Feoign uit o fo input 4 fina Low Peg High assembly unit Degree of power asymmatry, Final state: effects of migratton Hp: 2 counirios producing hc same g00d:; Produat'on factors flows Laburand Gapitat MPI = Marginal Product of Labour Final stato: distributive effects of Ho: 2 counties produci 8 same good; Producton facior Marginal Product of Labour migration flows in country 2 Labour and Casta uPL, MPL: mei, net, (resi ago Vibio (rca vige rel ee Immigrato sui or ione vpi Nord utpu o) vpi "pì Rsalwege -—Increaso (ABC) convargonca intel, (I tofp) tutor tefor tot 3 o Country 1 Country 2 Country 1 Country 2 (origin) (destination) (origin) (destination) i (COR a o o ner t o __ Final state a giynen cosa mnploymentin country 2 Fourth Part WHY MIGRATION? 1) New household economics 2) Dual labour market 3) Network theory 4) World systems theory 5) Institutional theory 6) Policy New household economics * Migration decision is taken not individually, but collectively — family * A family decides to migrate when the net gain from migration for the whole family (not only in economic terms) is positive = Improvement of household's conditions due to migration does not necessarily entails an improvement for each of the household®s members (at the individual level) + the best choice for the household may not be the best choice for the family members taken individually Example: * in the destination country the husband will have a better paid job (with a permanent contract) .... .... ‘while the wife either will do the same job but for lower wage, or she will lose her job ... .... moreover, the quality of the schools attended by their children will be worse .. > if the net improvement for this family is positive, they will decide to migrate; otherwise, they will not migrate .... Tied migration * Tied stayer: the family member who does not migrate although it would improve his/her individual condition (he/she is “tied” to stay in the home country) = Tied mover: the family member who migrates although this choice will deteriorate his/her individual condition (he/she is “tied” to move to the host country ...) Dual labour market in the host country * Labour market in the host country is segmented in two parts: — Primary segment — “Good” jobs: permanent contracts, higher wages, better career opportunities, higher status and professional achievement, etc. — Secondary segment — “Bad” jobs: fixed-term / temporary contracts, lower wages, employment in scarcely protected / unionized sectors (e.g., retail trade, logistics, agriculture, small size firms, etc.), without actual career opportunities, ... jobs frequently bordering the black economy Native workers are unavailable to fill vacancies in the secondary segment, while immigrant workers are available Quali-quantitative mismatch on the host country’s labour market, favoring immigrant =» Immigrants have a «reservation wage» lower than native workers: they cannot afford to refuse any job offer, even if they have higher education / skill (overskilled workforce) * No competition between native and immigrant workers: the socioeconomic structure of the host country brings each group to search for a job, and to be employed in one of the two labour market segments — complementarity Network Theory = Immigrants remain in contact with relatives and friends (informal links) living in the country of origin, exchanging information on their experience, country of destination, quality of life, etc.. = Nexus / ties between people at origin and destination encourage to migrate: “People move where they can rely on someone they know” + Diaspora-based migrations » Thanks to this nexus relatives and friends can get relevant information about the host country, and can reduce migration costs, like rent costs (they are hosted by their relatives / friends), reduction of job search costs (they are supported by the network), etc » In this respect, networks foster continuous migration flows on the same route origindestination: once the first-comers settle in the host country, they pull, “drag” further migrants from the same place of origin ... — Cumulative processes, which do not necessarily tend to an equilibriun : “the more the diaspora expands, the more it will attract new migrants” — Creation in a destination country of immigrant communities (ethnic groups) from the same country/locality World Systems Theory: core nations vs peripheral nations » The core developed nations (e.g., former colonial countries) 'recruit' migrants from peripheral developing nations (e.g., former colonies) with which they have historically strong, but hierarchical, relations + political and economic dominance of the former on the latter type of countries ... + — Core nations exploit resources of peripheral nations: they receive human resources (migrants) and they “send” capital and machinery ... Institutional theory Two types of institutions: *» Legal institutions (e.g., humanitarian organizations), which work to facilitate and support migratory movements providing services, assistance, facilities, etc. » Illegal institutions (e.g., human traffickers), which operate to perpetuate migratory movements for their own interests (obviously, they have criminal purposes, opposite from those of legal institutions). Policy * The role played by immigration policies, especially after World War II — set of national and international policies aimed at regulating and controlling immigration, admissions and flows. Effects of immigration on jobs and wages: an unreasonable fear? = The fear of job losses in the host country is unjustified: jobs are not lost due migration inflows. However, it is true that wages are affected, as assumed by the neoclassical approach * According to OECD: 10% 1 foreign workers + no changes in employment of native workers, but wages | 3-4% * Meta-analysis of the effects of immigration on the labour market (Nijkamp et al, 2006) — 1% increase in immigrants causes: — Increase in unemployment (0.024%) — Wage reduction (-0.12%) — Positive / null impact on the public budget: immigrant workers have a rate of unemployment higher than native workers (therefore they can get more public benefits), but their average age is lower, so they are net contributors ... Effects of immigration to the US * Relevant migration inflows in US from the 1970s onwards (in particular, from Latin America and Asia) which, according to some studies, had effects on: — Workforce — strong increase (5OmiIn of immigrants in 2019) — Wages — according to Borjas (2003), -3% compared to average wages (without immigration) — Total income + increase in output and income, mostly used for immigrant wages (immigration surplus very low: about 0.1% of GDP) Effects of immigration to the US * Other studies on US suggest that effects of immigration on wages change according to the level of education and skills — Highly educated / skilled immigrant take up jobs with low level of substitutability — no competition with native workers — Moreover, they have a high level of productivity — they give a high contribution to the economic output (at the finm°s and aggregate level) — positive effects on the average wages of highly skilled native workers — On the other hand, low skilled immigrants, given the high level of substitutability of their jobs, are in competition with native workers — negative effects on the average wages of low skilled native workers (up to -8%) Effects of migrations from Eastern to Western Europe: economy * According several studies, positive impacts on the destination countries - GDP in EU-15 countries rose by 1% between 2004 and 2009, thanks to immigration from Eastern EU countries (increase even higher in UK, Italy, Ireland and Spain) — Immigrants enabled those national economic systems to work better, i.e., those labor markets to be better balanced, filing structurally uncovered vacancies (e.g., caregiving services) » Negligible impact on wages, even on those of the low-skilled segments * Positive impacts even on the economy of the countries of origin — Increase of the GDP per capita — Increase of remittances Remittances A remittance is a non-commercial transfer of money by a foreign worker, a member of a diaspora community, or a citizen with familial ties abroad, for household income in their home country or homeland.