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International Trade Effect Of Trade Between Countries

1673 words - 7 pages

More specifically, we saw that the specific factor in the sector whose relative price increases will gain, and that the specific factor in the other sector (whose relative price decreases) will lose. We also saw that the welfare changes for the mobile factor are ambiguous.

Measuring gains vs. losses would be difficult as welfare is inherently subjective. A better way is to see if those who benefit can compensate others who lose and still be better off.

Aggregate gains from trade can be shown as followed:
In a country that cannot trade, the output of a good must equal its consumption. If DC is consumption of cloth and DF consumption of food, then in a closed economy, Dc=Qc and Df=Qf
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The Political Economy of Trade:
The specific factors model suggests that those who lose most from trade are the owners of immobile factors in the import competing sector. In the real world, this includes not only the owners of
capital, but also a portion of the labour force in those importing-competing sectors.
Reasons why economists still promote trade:
* Income distribution effects are not specific to international trade. Other economic changes such as tech progress, changing consumer preferences and resource chances lead to income distribution effects.
* Always better to allow trade and compensate those hurt by it than to prohibit trade. More support rather than less trade is encouraged.
Empirical evidence for trade:
US data on unemployment and import penetration compiled by the National Bureau of Economics Research shows that in the period between 1984 and 2008, imports as a percentage of GDP have risen significantly whilst unemployment as a percentage of the workforce has decreased dramatically.
International Labour Mobility
In reality, labour mobility is less prevalent than capital mobility due to immigration restrictions. It is important to understand the forces that drive the desired migration of workers across borders and the SR impact of these flows.

Krugman Chapter 5: Heckscher-Ohlin Model
2 goods: cloth and food
Immobile factors from the specific factors model are now mobile in the long run. In the long run, both capital and labor can move across sectors, thus equalizing their returns (rental rate and wage) in both sectors.

Prices and Production

Cloth and food are used producing capital and labour:

In the above equations the quantity of labour used to produce a good is stated rather than the unit requirement. This is because when there are 2 factors of production there may be room for choice in the inputs. Mostly these choices will depend on factor prices.

Non substitutable factors:
Production of 1 yard of cloth requires a combination of 2 worker hours and 2 machine hours. The production of food is more automated; as a result, production of 1 calorie of food requires only 1 work-hour along with 3 machine-hours.

In the case on non-substitutable factors of production however the economy is subject to both constraints so PPF is the kinked red line.
The opportunity cost of cloth production therefore is NOT CONSTANT
In the case on non-substitutable factors of production however the economy is subject to both constraints so PPF is the kinked red line.
The opportunity cost of cloth production therefore is NOT CONSTANT

Substitutable factors:
Substitution removed the kink in the PPF and causes it to be bowed. This shape tells us that the opp. cost of producing cloth in terms of food rises as the economy produces more cloth and less food.
Where the economy produces depends on prices – the economy produces at the point which maximises the value of production:
An isovalue line (along...

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