Topic 7: Globalization & Policy in HOS

Question 1

What are three distortions in the modern economy?

Answer 1

• Tarrifs and non-tarrif barriers
• Natural barriers (infrastructure and communication costs)
• Capital mobility barriers (capital controls, communication costs & regulatory diferences)

Question 2

Why have distortions caused by infrastructure & communication costs decreased with globalization?

Answer 2

Technoloical change!

Question 3

Why have policy distortions been decreasing with globalization?

Answer 3

• Governments competing for investment.
• Peace time negociation.

Question 4

What distortions exist in the north, and why?

Answer 4

Distortions:

• Tariffs and quotas on X (labour intensive) imports.
• VERs (exporter quotas).

Reasons:

• Mostly democracies.
• Capital owners are minority voters.
• Majority voting favours wage increases, achieved by protecting home X industry.

Question 5

Why have distortions been supported in Australia?

Answer 5

The normal for the OECD countries, plus:

• 19th & early 20 centuries, population growth seen as important so high wages are needed to induce European migration

Question 6

What distortions exist in the South, and why?

Answer 6

Distortions:

• Tarrifs and quotas on Y imports (capital intensive).
• Licensing of imports to facoured groups & individuals.

Reasons:

• Mostly autocratic, capital owners politically powerful
• Government regimes buy support by rationing foreign borrowing and imports.

Question 7

What’s the terms of trade, autarky price ratio and wage-rent ratio in the north and south?

Answer 7

P_South < P_Trade < P_North

(w/r)_South < (w/r)_North

Question 8

Run through the sequence of globilization shocks that can be used in the HOS model

Answer 8

• Tech changes make savings more flexible and allow greater expansion in K in developing countries where rates of return are higher
• Tech changes and Inf. investment decrease natural barriers to trade
• North and South reduce tariffs to compete for savings and investment.
• Overall trade distortions decline.

Question 9

What are the results of ‘globalization’ in the HOS model?

Answer 9

In the North, inequality tends to increase, as

• The real wage of raw labour falls
• Real return to capital rises.

However income total rises, and all may still gain absolutely.

Question 10

What effects have exacerbated growing inequality in the north?

Answer 10

• IT driven automation reduces the need for raw labour eveerywhere. Not a consiquence of globalization, but shares a common cause.
• End of the cold war introduces trading parners with poor capital but labour like any other labour.

Question 11

What affects have migitated the growth of inequality in the north?

Answer 11

1. Improvement in terms of trade in the North. As the south will grow more rapidly, it will depreciate, improving the income of the north.
2. Some of capital invested in the South is owned by residents of the North, so GNP will increase.
3. Non-traded service demand rises in the north as income grows (not represented in HOS model), putting an upward pressure on wages.
4. Differentiated products allow labour intensive production to continue in the north (not modelled in HOS)
5. Low skill households consume more of X then capital owning households. Since X is made cheaper in the north, this imporves the terms of trade of low-skill households and raises their income.
6. The north has some tax solutions

Question 12

How can governments use the tax system to offset inequality with globalization?

Answer 12

Capital income is growing but it’s hard to tax, and it repeals investment. An alternative is a GST.

Question 13

How have OECD governments responded to globalization causing inequality?

Answer 13

1. Increase economic growth
2. Maintain or increase tax transfers to the poor
3. Try to shift factor endowments. Raise public investment in education and training.