Review of International Trade Theory

1
Commerce and Coalitions

• Review of International Trade Theory

2
Comparative Advantage

• 1. Comparative advantage trade
• 2. Gains from trade in an industry
• 3. Effects of a tariff

3
1. Comparative Advantage ? ? Trade
Definition Lower relative price (not necessarily
absolute)

• Different productivity
• Different technology
• Different factor endowments

4
Comparative Advantage
Example Common technology, different factor
endowments

• Technology 1 K 2 L 1 Textile 2 K 1 L
  1 Iron
• Factor endowments
• Australia has 4 K and 2 L (2 iron or 1 tex)
• Bulgaria has 2 K and 4 L (2 tex or 1 iron)

5
Comparative advantage
Iron
PA Iron 1/2 Textile
2
PB Iron 2 Textile
W
A
PWorld 1 Iron 1 Textile
1
B
Textiles
1
2
6
Conclusions

• Trade improves welfare because higher
  indifference curves become reachable
• Trade lowers price of Textiles in capital-rich
  country A, hurting laborers
• Trade lowers price of Iron in labor-rich country
  B, hurting capital owners

Intuition Scarcity ? High price. Trade reduces
scarcity
7
2. Gains from trade in an industryImporting
country (PD gt PW)
P
D
S
PD Domestic price
PD
PW World price
PW
Q
QD
QCW
QPW
8
2. Gains from trade in an industryImporting
country (PD gt PW)
P
D
S
PD
PW
Value of imports
Q
QD
QCW
QPW
9
2. Gains from trade in an industryImporting
country (PD gt PW)
P
D
S
PD
Consumer gain
PW
Q
QD
QCW
QPW
Consumer gains
QD (PD - PW)
1/2 (QCW - QD)(PD - PW)
10
2. Gains from trade in an industryImporting
country (PD gt PW)
P
D
S
Welfare Gains gt Losses
PD
Producer loss
PW
Q
QD
QCW
QPW
Producer loss
QPW (PD - PW)
1/2(QD - QPW)(PD - PW)
11
2. Gains from trade in an industry Exporting
country (PD lt PW)
P
D
S
PW
PD Domestic price
PD
PW World price
Value of exports
Q
QD
QPW
QCW
12
2. Gains from trade in an industry Exporting
country (PD lt PW)
P
D
S
PW
Producer gains
PD
Q
QD
QPW
QCW
Producer gain
QD (PW - PD)
1/2(QPW - QD)(PW - PD)
13
2. Gains from trade in an industry Exporting
country (PD lt PW)
P
D
S
PW
Welfare Gains gt Losses
Consumer loss
PD
Q
QD
QPW
QCW
Consumer loss
QCW (PW - PD)
1/2(QD - QCW)(PW - PD)
14
2. Gains from trade in an industry
Importing country
Exporting country
P
S
D
P
D
S
Pl Cg
Cg
Pg
Cl Pg
Q
Q

• Conclusions - Trade increases welfare
• - Winners and losers
• - Compensation?

15
3. Effects of a tariff
S
D
P
PD
PD Domestic price
PW World price
PT
PW
PT Price with tariff
Q
QCW
QPW
QPT
QCT
Imports with tariff
Imports with no tariff
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3. Effects of a tariff
S
D
P
PD
Consumer loss
PT
A B C D
A
B
C
D
PW
Q
QCW
QPW
QPT
QCT
Imports with tariff
Imports with no tariff
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3. Effects of a tariff
S
D
P
Gains
Producer gains A
PD
Government gains C
PT
A
C
B
D
PW
Welfare loss
B D
Q
QCW
QPW
QPT
QCT
Imports with tariff
Imports with no tariff
18
Why not compensate the losers?

• Concentrated costs, diffuse benefits
• Incentives to defect
• Economic change shifts political power
• Bargaining
• Why bother?

19
Stolper-Samuelson

• Intuition scarcity -gt high price
• Factors of production that are more scarce
  domestically than globally have a higher price in
  the absence of trade
• Domestically abundant factors are more valuable
  if there is trade
• Domestic coalitions should depend on which
  factors are abundant

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Trade and Cleavages
Land-Labor ratio
High (land)
Low (land)
(urban- rural)
(class conflict)
High K
(urban- rural)
(class conflict)
Low K

• Change occurs when
• Trade increases (transport costs decrease)
• Relative factor endowments change (development K
  increases)