International Trade - 柯风

February 13, 2025

Gain from trade: Workers’ gain

• Gains from trade

  • Production

  • Consumption

  • Workers’ Gain

    • Worker’s wage in home country: W = P_c / MP_L or W = W/P_C (Terms of cheese)

      • MP_L = P_C/a_LC

      • Home Country Wage: $12 an hour

      • Foreign Country Wage: $4 an hour

• Home’s exports: Cheese

  • a_lc = 1

  • ½ = P_C / P_W

• Foreign exports: Wine

  • a_lc = 3

  • 2 = P_{W /} P_C

Misconceptions about Free Trade and Comparative Advantage

• Free trade is beneficial only if a country is more productive than foreign countries.

  • Opportunity cost drives the need for free trade, not necessarily the productivity. Some people don’t want to give up certain products for a different one.

• Free trade with countries that pay low wages hurts high wage countries.

  • While trade may reduce wages for some workers, thereby affecting the distribution of income within a country, trade benefits consumers and other workers.

  • Consumers benefit because they can purchase goods more cheaply.

  • Producers/Workers benefit by earning a higher income in the industries that use resources more efficiently, allowing them to earn higher prices and wages relative to no-trade.

• Free trade exploits less productive countries whose workers make low wages.

Complete Specialization/Transportation costs and non-traded goods

• The Ricardian model predicts that countries completely specialize in production.

• Do we see that in reality?

  • This rarely happens for three main reasons

    • More than one factor of production reduces the tendency of specialization (Chapters 4 - 5)

    • Protectionism (Chapters 9 - 12)

      • Trump’s Tariffs being imposed is an example of protectionism.

    • Transportation costs reduce or prevent trade, which may cause each country to produce the same good or service.

    • Non-traded goods and services (haircuts/auto repairs) exist due to high transport costs.

      • Countries tend to spend a large fraction of national income on non-traded goods and services.

      • This fact has implications for the gravity model and for models that consider how income transfers across countries affect trade.

Ricardian Model: Empirical Evidence

• Do countries export those goods in which their productivity is relatively high?

  • Positively sloped line, export the goods you are relatively more productive in.

• Relative productivity matters most in trade

• The main implications of the Ricardian Model are well supported by empirical evidence

  • Productivity

  • differences play an important role in international trade

  • Comparative Advantage

February 18, 2025

• Trade inequality

  • Some unequal distribution, some heads might lose their job.

H-O Model

• Assumptions

  • H-O model only uses two factors of production, labor and capital

    • You are combining both. You can’t do something with just capital, you need someone to work that.

  • Only two goods are being traded. (Food & Cloth)

  • Only two countries, Home and Foreign

  • Identical Taste

    • Both countries

  • Same technology across both countries.

    • Not for both goods. We are assuming the same technology is present in both countries. For example: To make cloth is the same in both countries but to make cloth in one country is different than making food in a different country.

    • “The way you combine labor and capital to produce food at home is the same as foreign.” (The ratio)

  • Different relative factor endowments/stock.

    • Factor endowment/stock: total available quantity of labor and capital you have.

• Ricardian Model

  • Just uses one factor of production, labor

  • Only two goods are being traded. (Cheese & Wine)

  • Only two countries, Home and Foreign

  • Identical Taste

    • Both countries

  • Labor productivity is constant.

  • Labor productivity varies from country to country.

  • Technology is different across sectors and countries.

    • Technology: Combing your inputs to make an output. Whatever you’re doing for that, could be the process for making it.

• Comparative Advantage: When you can produce a good for less of an opportunity cost than another country.

• Factor intensities: Ratio of labor to capital for a specific good.

  • Assumption about these: They are not equal for both goods.

    • Labor intensities for food ≠ labor intensities for clothing.

• Home is relatively abundant in labor. Relatively scarce in capital.

February 27, 2025

Introduction Draft, due tonight

I am research Sweden for my presentation.

March 11, 2025

For the Midterm

• Need to explain on each answer why that is the answer.

• No Class 03/13/2025 for Midterm

March 25, 2025

• Read Chapter 5 + 6 of textbook

Models so far

• Ricardian Model

  • One Factor

  • Facor productivity differential

• Hecksher-Ohlin Model

  • Two factors

  • Identical Technology

  • Relative Factor Endowment differential

• Specific Factor Model

  • Three Factors

  • Restricted Factor Mobility

  • One factor mobile, two factors not mobile.

Standard Trade Model

• Standard trade model is a general model that includes Ricardian, specific factors, and Heckscher-Ohline models as special cases.

  • Two goods, Food (F) and cloth (C)

  • Each country’s PPF is a smooth curve.

    • PPF: Tells you the maximum amount you can produce with your current resources.

    • Slope gives you the opportunity cost of production.

• Helps us understad the welfare effects of trade in a more generalized framework.

• Helps us to analyze welfare effects of trade due to changes in this economy.

• Example:

  • What happens to a country’s welfare if there is an expansion in its export sector?

  • What happens to a country’s welfare if there is an expansion in its import sector?

Trade and Income Distribution

• Two main reasons why international trade has strong effects on the distribution of income within a country:

  • Industries differ in the foctors intensities (H-O Model).

  • Resources cannot move immediately or costlessly from one industry to another.

Standard Trade Model: Summary

• Sources of trade:

  • Differences in production possibilty frontiers.

  • Differences in labor services, labor skills, physical capital, land, and technology between couuntries cause differences in production possibility frontiers.

• Relative supply:

  • A country’s PPF determines its relative supply function in each country.

  • National relative supply functions dtermine a world relative supply function.

• World Equilibium:

  • World relative supply function along with world relative demand determines the equilibirium under international trade.

Production

• How much cloth and food a country produces depends on the relative price of cloth to food P_c / P_F and opportunity costs.

• Remember, the producer is always trying to maximize profits.

Relative Supply

• Relative supply curve is the relationship between relative quanitity of goods supplied and relative prices of the good.

• Need to find how production changes when the relative prices change.

April 1, 2025

• What is terms of trade:

  • Price of exports divided by price of imports: P_X / P_M

    • X = Volume of Exports

    • M = Volume of imports

  • Increase in the terms of trade leads to welfare going up. They grow together and decrease together.

Standard Trade Model: Applications

• Helps us to analyze welfare effects of trade due changes in the economy.

  • Example:

    • What happens to a country’s welfare if there is an issue in its export sector?

    • What happens to country’s welfare if there is an increase in its import sector?

• Outward shift on the PPF means growth in the country.

April 3, 2025

Trade Policies

• Government adopts various policies that affect the volume of trade, terms of trade between countries.

• Examples:

  • Import tariffs

  • Import Quotas

  • Ad-Valorem Tariffs

  • Export subsidies

  • Voluntary Export Restraints

• Such policies may have important effects on countries welfare and income.

Types of tariffs

• A tariff is a tax levied when a good is imported.

• A specific tariff is levied as a fixed charge for each unit of imported goods.

  • For example, $2 per barrel of oil.

  • Per unit tariff

  • If a T-Shirt costs $10 per shirt, for every T-Shirt you import you pay $3 to import it so the producer will up the cost to $13 a shirt.

• An ad valorem tariff is levied as a fraction of the value of imported goods.

  • For example, 25% tariff on the value of imported trucks.

  • Think of the Chicken Tax type shit

Effects of trade policies

• Focus on one kind trade policy

  • Import tariffs (specific tariff): taxes levied on imports

• Analyze the effect of these policies using

  • General equilibrium framework

  • Partial equilibrium framework

Import Tariffs and Export Subsidies

• Both policies influence terms of trade and therefore national welfare.

• Import tariffs and export subsidies drive a wedge between prices in world markets and prices in domestic markets.

• Simultaneous shifts in RS and RD.

Import tariff, Terms of trade, Welfare

• Continue with our previous assumptions:

  • 2 countries: home and foreign

  • 2 goods: cloth and food

  • Both countries are trading with one another

  • Home exports cloth and foreign exports food

• Analyze the relative price and supply effects of a tariff imposed by one country on the other.

• Need to make an additional assumption regarding size of the economy in the world market.

  • Large

  • Small

Import tariff: Relative prices and supply

• Home country imposes a tariff on food imports.

  • Create a wedge between domestic (internal) and world (external) prices of goods.

    • Internal price: price at which goods are traded within the country (nationally)

    • External price: price at which goods are traded internationally (world market) — terms of trade.

• Suppose home country imposes a 20% tariff on the value of food imports.

  • The (internal) price of food relative to the price of cloth rises for domestic consumers.

  • Likewise, the (internal) price of cloth relative to the price of food falls for domestic consumers.

• Supposed home country imposes a 20% tariff on the value of food imports,

  • Domestic producers will receive a lower relative price of cloth, and therefore will be more willing to switch to food production.

  • Relative supply of cloth will decrease in the world market (World relative supply of cloth shifts to the left.)

  • Domestic consumers will pay a lower relative price for cloth, and therefore will be more willing to switch to cloth consumption.

  • Relative demand for cloth will increase (World relative demand for cloth shifts to the right).

Import Tariff: Terms of trade and welfare

• When the home country imposes an import tariff, the terms of trade increase and the welfare of the country may increase.

• The magnitude of this effect depends on the size of the home country relative to the world economy.

  • If the country is a small part of the world economy, its tariff policies will not have much effect on world relative supply and demand, and thus on the terms of trade.

  • But for large country, a tariff may maximize national welfare at the expense of foreign countries.

• Tariff imposes costs by distorting production and consumption incentives in Home country.

• Over all effect on tariff on welfare depends on:

  • How terms of trade gain compares to efficiency losses.

• Need to take a closer look to evaluate the welfare effects of tariffs — Partial Equilibrium Analysis — where we focus on one market (import competing goods) in the home country and analyze the gains and losses from tariffs.

Partial Equilibrium Analysis

• Partial Equilibrium: Focus on a single market rather than all sectors in the economy.

• Consider how a tariff affects a single market, say that of wheat.

• Two countries: Home and foreign

• One good: wheat

• Both country consume and produce wheat.

Tariff and Welfare: Partial Equilibrium Analysis

• We will consider specific tariff, t

• Tariff creates a wedge between domestic price and foreign price

  • P_t = P^* + t

April 15, 2025

• Review Midterm Review