Chapter 5: Distributional and Economies of Scale Effects of International Trade

Question 1

Differences in international trade if we assume open economies with 2 or more production factors

Answer 1

• Occurrence of trade explained by differences in relative factor endowments that create different autarky prices comparative advantages
• Winners and losers of trade

Question 2

Which production factors will countries specialise on with multiple factors of production?

Answer 2

• low-skilled labor and capital

- HO model assumes capital-abundant home and labor abundant foreign country

Question 3

Why do labor unions oppose global trade?

Answer 3

• Unions don’t care about efficiency, they care about fairness
• Concerned about their members

Question 4

Who are winners and losers of trade?

Answer 4

• Short run: Home and foreign capital owners and workers lose in the industry that has to reduce production due to specialisation and trade
• Long run: Capital owners can shift capital from one industry to another, so they lose in the short but win in the long run
• Low skill workers are losers in short and long run

Question 5

Wages in Germany have dropped less than in other countries. Does this mean low-skill workers are better protected?

Answer 5

• No, not necessarily
• Low skill workers might have lost their jobs because employers couldn’t;t lower wages any more and had to let workers go

Question 6

What’s an optimal strategy to minimise disadvantages of global trade?

Answer 6

• Defensive strategy: Impose restrictions on competing imports
• Better: Precautionary Strategy: Shift resources to more sophisticated industries, educate less skilled -> turn losers into winners
• Fair if individual losses are reduced and remaining losers are really compensated

Question 7

Infant industry argument

Answer 7

• In long run more efficient world market production and cheaper products
• Inefficiency:
• Lack of info, government doesn’t have expertise to chose right industry
• Other governments might identify same industries, leading to over subsidised markets and unprofitable industries
• Lobbyism
• Insufficient efficiency
• No competition means low incentives to innovate and reduce costs
• > fails in reality due to missing global competition