The Nation and the World Economy 2 Flashcards
1
Q
Gains from trade
A
- Specialisation in production - from our trade model:
- Countries can specialise in production and be more efficient due to larger-scale production
- Countries use their resources to produce what they are most productive at (compared to their other production choices), then trade those products for goods and services that they want to consume
- Trade allows countries to export goods made with relatively abundant resources and imports goods made with relatively scarce resources
- E.g., Norwegian consumers import oranges that they would have a hard time producing
2
Q
More gains from trade
A
- Trade almost always generates mutual benefits to both
countries - When a buyer and a seller engage in a voluntary transaction, both can be made better off
- Free trade allows firms or industry to take advantage of
economies of scale - Countries can gain by trading current resources for future resources
- International borrowing and lending
3
Q
Trade often produces winners and losers
A
- Trade is predicted to benefit countries as a whole in several ways; however, trade may harm particular groups within a country
- International trade can harm the owners of resources that are used relatively intensively in industries that compete with imports
- Benefits of international trade not distributed evenly across individuals within those countries
4
Q
Winners and losers from trade in the short run
A
- Opening trade increases countries’ consumption possibility sets but conflicts of interest emerge between and within countries
- Winners and losers from trade depend on the relative scarcity of factors (e.g., skilled or unskilled labour and capital)
- Relatively abundant factors within a country are relatively cheap, and gain when trade raises their price towards the world average
- Conversely, the price of relatively scarce factors falls towards the world average due to trade
5
Q
Hypothetical trade example
A
- There are 2 goods: passenger aircraft (capital-
intensive) and consumer electronics (labour-intensive) - The US is relatively capital abundant, whereas China is
relatively labour abundant - Specialization according to factor endowments
- Winners in the US: Owners of capital * Inequality should rise
- Winners in China: Workers (higher wages) * Inequality should fall
- After trade, the size of the economy could increase * Everyone could benefit
- China: absolute slices of economy going to workers and capital owners both increase
- US: worker’s slice smaller both in absolute and relative terms
6
Q
Another trade example
A
- Two industries that require employees with different levels of skills/education: a skill-intensive industry (information technology) and a non skill-intensive industry (consumer electronics assembly)
- After trade: unskilled workers in rich countries (skilled workers in poor countries) will lose out. Skilled workers in rich countries (and unskilled workers in poor countries) will gain
- Unskilled workers in rich countries are more protectionist than skilled workers, but unskilled workers in poor countries are more in favour of trade than skilled workers
7
Q
Winners and losers in different time frames
A
- In the long run, specialisation according to comparative advantage has similar labour market effects as technological progress
- Increased productivity shifts the price-setting curve upwards
- In the short run, jobs are destroyed
- In the medium run, growth in export industries creates
new jobs - Long-run adjustment process depends on how much wage-setting curve shifts
8
Q
What kind of trade do most economists strongly favour?
A
- Let us look at some debates on winners and losers from trade
- Trade and unemployment
- Trade and income distribution
- Income inequality
9
Q
Trade and unemployment
A
- In our two-country model, we assume workers immediately find better jobs in other sectors
- Trade shifts jobs from import competing sector to export sector
- Process not instantaneous: some workers will be unemployed as they look for new jobs
- There are costs associated with switching jobs
- Skills across different industries differ: significant new training needed which is costly
- Significant changes in way of life
10
Q
Trade and unemployment in different countries
A
- In the US, unemployment is primarily a
macroeconomic problem that rises during recessions - The best way to reduce unemployment is by adopting macroeconomic policies to help the economy recover, not by adopting trade protection policies
- Is import competition from China at fault for declines in manufacturing employment in the U.S?
- Would closing off the US from trade with China increase the share of employment in US manufacturing?
11
Q
Trade and income distrubution
A
- International trade often has strong effects on the distribution of income within countries both in the short and long run
- Trade benefits factors that are specific to the export sector in a country but hurts factors specific to the import-competing sectors
- However, trade benefits a country by expanding choices
12
Q
Analysing T and I scenario
A
- Relative to the rest of the world, US is abundantly endowed with highly skilled labour while low skilled labour is correspondingly scarce
- International trade has the potential to make low skilled workers in the US worse off, not just temporarily, but on a sustained basis
- Is international trade the major cause of increasing income inequality in the US?
- Other causes are responsible (e.g., new technologies)
13
Q
Political bias in trade politics
A
Potential losers from trade are better politically organised than the winners from trade
* Typically, those who gain from trade are a much less concentrated, informed, and organised group than those who lose
* For instance, consumers versus producers in the US (in the sugar industry) & EU (farmers)
* E.g., the Common Agriculture Policy in the EU
14
Q
What is the key take away on winners and losers from trade?
A
- Trade benefits a country by expanding choices
- Possible to redistribute income so that everyone gains from trade
- Those who gain from trade could compensate those who lose and still be better off themselves
- That everyone could gain from trade does not mean that they actually do: redistribution usually hard to implement
- Optimal trade policy must weigh one group’s gain against another’s loss
15
Q
Migration
A
- The short-run impact of immigration is bad for existing workers in that country: wages fall and the expected duration of unemployment increases.
- When new people arrive, they are unemployed: increased unemployment
- Immigration also increases the cost of job loss for residents: workers who lose jobs are in a larger pool of unemployed workers
- Firms can pay lower wages to incentivize workers * The short run may last for years or even decades
