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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 = Pc / MPL or W = W/PC (Terms of cheese)

        • MPL = PC/aLC

        • Home Country Wage: $12 an hour

        • Foreign Country Wage: $4 an hour

  • Home’s exports: Cheese

    • alc = 1

    • ½ = PC / PW

  • Foreign exports: Wine

    • alc = 3

    • 2 = PW / PC

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 Pc / PF 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: PX / PM

      • 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

    • Pt = P* + t

April 15, 2025

  • Review Midterm Review