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

Class Notes