Transcript Document

Effects of International Trade
Between Two-Factor Economies
Figure 4-8: Trade Leads to a Convergence of Relative Prices
Relative price
of cloth, PC/PF
RS*
RS
3
2
1
RD
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Relative quality
of cloth, QC + Q*C
Q F + Q *F
Slide 4-1
Effects of International Trade
Between Two-Factor Economies
• When Home and Foreign trade with each other, their
relative prices converge. The relative price of cloth
rises in Home and declines in Foreign.
– In Home, the rise in the relative price of cloth leads to a
rise in the production of cloth and a decline in relative
consumption, so Home becomes an exporter of cloth
and an importer of food.
– Conversely, the decline in the relative price of cloth in
Foreign leads it to become an importer of cloth and an
exporter of food.
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Slide 4-2
Effects of International Trade
Between Two-Factor Economies

Trade and the Distribution of Income
• Trade produces a convergence of relative prices.
• Changes in relative prices have strong effects on the relative
earnings of labor and land in both countries:
– In Home, where the relative price of cloth rises:
– Laborers are made better off and landowners are made worse off.
– In Foreign, where the relative price of cloth falls, the opposite
happens:
•
– Laborers are made worse off and landowners are made better off.
Owners of a country’s abundant factors gain from trade, but
owners of a country’s scarce factors lose.
Note: Home-labor abundant/ foreign-land abundant
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Slide 4-3
A Model of a Two-Factor Economy
Figure 4-4: From Goods Prices to Input Choices
Wage-rental
ratio, w/r
CC
FF
(w/r)2
(w/r)1
SS
Relative
(PC/PF)2 (PC/PF)1
price of
Increasing
cloth, PC/PF
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(TC/LC)1 (TC/LC)2(TF/LF)1 (TF/LF)2 Landlabor
Increasing
Ratio, T/L
Slide 4-4
Effects of International Trade
Between Two-Factor Economies
 Factor Price Equalization
• In the absence of trade: labor would earn less in Home
than in Foreign, and land would earn more.
• Factor-Price Equalization Theorem:
– International trade leads to complete equalization in the
relative and absolute returns to homogeneous factors
across countries.
– It implies that international trade is a substitute for the
international mobility of factors.
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Slide 4-5
Effects of International Trade
Between Two-Factor Economies
• Has international trade equalized the returns to
homogeneous factors in different countries in the real
world?
– Even casual observation clearly indicates that it has not.
– Example: Wages are much higher for doctors, engineers,
technicians, mechanics and laborers in the United States and
Germany than in Korea and Mexico.
– Under these circumstances, it is more realistic to say
that international trade has reduced, rather than
completely eliminated, the international difference in
the returns to homogeneous factors.
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Slide 4-6
Effects of International Trade
Between Two-Factor Economies
Table 4-1: Comparative International Wage Rates (United States = 100)
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Slide 4-7
Effects of International Trade
Between Two-Factor Economies
• Three assumptions crucial to the prediction of factor
price equalization are in reality untrue:
– Both countries produce both goods
– Both countries have the same technologies in
production
– Both countries have the same prices of goods due to
trade
• One thing the factor-price equalization theorem does
not say is that international trade will eliminate or
reduce international differences in per capita incomes.
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Slide 4-8
Empirical Evidence on the
Heckscher-Ohlin Model
 Implications of the Tests
• Empirical evidence on the Heckscher-Ohlin model has
led to the following conclusions:
– It has been less successful at explaining the actual
pattern of international trade.
– It has been useful as a way to analyze the effects of
trade on income distribution.
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Slide 4-9
Summary
 The owners of a country’s abundant factors gain


from trade, but the owners of scarce factors lose.
In reality, complete factor price equalization is not
observed because of wide differences in resources,
barriers to trade, and international differences in
technology.
Empirical evidence is mixed on the HeckscherOhlin model.
• Most researchers do not believe that differences in
resources alone can explain the pattern of world
trade or world factor prices.
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Slide 4-10
Effects of International Trade
Between Two-Factor Economies
 Assumptions of the Heckscher-Ohlin model:
• There are two countries (Home and Foreign) that have:
– Same tastes
– Same technology
– Different resources
– Home has a higher ratio of labor to land than Foreign
does
• Each country has the same production structure of a
two-factor economy.
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Slide 4-11
Introduction
 This chapter is focused on the following questions:
• What are the effects of various trade policy
instruments?
– Who will benefit and who will lose from these trade
policy instruments?
• What are the costs and benefits of protection?
– Will the benefits outweigh the costs?
• What should a nation’s trade policy be?
– For example, should the United States use a tariff or an
import quota to protect its automobile industry against
competition from Japan and South Korea?
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Slide 4-12
Introduction
Classification of Commercial Policy Instruments
Commercial Policy Instruments
Trade Contraction
Price
Quantity
Tariff
Export tax
Import quota
Voluntary
Export
Restraint
(VER)
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Trade Expansion
Price
Import subsidy
Export subsidy
Quantity
Voluntary
Import
Expansion
(VIE)
Slide 4-13
Basic Tariff Analysis
 Tariffs can be classified as:
• Specific tariffs
– Taxes that are levied as a fixed charge for each unit of
goods imported
– Example: A specific tariff of $10 on each imported bicycle
with an international price of $100 means that customs
officials collect the fixed sum of $10.
• Ad valorem tariffs
– Taxes that are levied as a fraction of the value of the
imported goods
– Example: A 20% ad valorem tariff on bicycles generates a $20
payment on each $100 imported bicycle.
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Slide 4-14
Basic Tariff Analysis
• A compound duty (tariff) is a combination of an ad valorem
and a specific tariff.
• Modern governments usually prefer to protect domestic
industries through a variety of nontariff barriers, such as:
– Import quotas
– Limit the quantity of imports
– Export restraints
– Limit the quantity of exports
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Slide 4-15