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Commerce and Coalitions

Commerce and Coalitions. Review of International Trade Theory. Comparative Advantage. 1. Comparative advantage –› trade 2. Gains from trade in an industry 3. Effects of a tariff. 1. Comparative Advantage → → Trade. Definition : Lower relative price (not necessarily absolute).

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Commerce and Coalitions

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  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 > PW) P D S PD: Domestic price PD PW: World price PW QPW QD QCW Q

  8. 2. Gains from trade in an industryImporting country (PD > PW) P D S PD PW Value of imports QPW QD QCW Q

  9. 2. Gains from trade in an industryImporting country (PD > PW) P D S PD Consumer gain PW QPW QD QCW Q Consumer gains: QD (PD - PW) + 1/2(QCW - QD)(PD - PW)

  10. 2. Gains from trade in an industryImporting country (PD > PW) P D S Welfare Gains > Losses PD Producer loss PW QPW QD QCW Q Producer loss: QPW (PD - PW) + 1/2(QD - QPW)(PD - PW)

  11. 2. Gains from trade in an industryExporting country (PD < PW) P D S PW PD: Domestic price PD PW: World price Value of exports QCW QD QPW Q

  12. 2. Gains from trade in an industryExporting country (PD < PW) P D S PW Producer gains PD QCW QD QPW Q Producer gain: QD (PW - PD) + 1/2(QPW - QD)(PW - PD)

  13. 2. Gains from trade in an industryExporting country (PD < PW) P D S PW Welfare Gains > Losses Consumer loss PD QCW QD QPW Q Consumer loss: QCW (PW - PD) + 1/2(QD - QCW)(PW - PD)

  14. 2. Gains from trade in an industry Importing country Exporting country P D S 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 D S P PD PD: Domestic price PT PW: World price PW PT: Price with tariff QPW QCW Q QPT QCT Imports with tariff Imports with no tariff

  16. 3. Effects of a tariff D S P PD Consumer loss: PT A + B + C + D A B C D PW QPW QCW Q QPT QCT Imports with tariff Imports with no tariff

  17. 3. Effects of a tariff D S P Gains: Producer gains: A PD Government gains: C PT A B C D PW Welfare loss: B + D QPW QCW Q 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 -> 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

  20. 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)

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