trade and distribution Flashcards
are trade and growth related and why?
Ricardos principle of comparative advantage demonstrates that trade can lead countries to enjoy consumption positions outside their PPF, that is aggregate real incomes can grow as a result of trade. the more countries incomes grow the more their populations want to consume goods and services from other countries and thus a virtous circle occurs as trade promotes growth which promotes trade and growth and trade etc
how might trade and openess accelerate growth?
via capital accumulation eg formation of the EU
via scale effects and larger markets ( adam smith)
via competition which drives out less efficient firms increasing average productivity (stephen parent and edward prescott)
technological progress via the flow of FDI and ideas (Paul Romer)
what is the economics of ideas by paul romer?
he states that technology is knowledge and knowledge comes from ideas. the transfer of ideas stimulate technological progress. more open economies absorb new ideas and have a faster rate of technological progress and faster growth (North Korea vs south Korea). the transfer of ideas can come from foreign direct investment and multinational companies
Will high wage economies lose revenue and jobs in trade with low wageeconomies in East Asia?
no as the high wage economies will specialise in industries that require expensive and highly skilled workers whilst low wage countries will specialise in low tech, low wage industries. although low wage jobs may go to low wage countries the export revenue will not fall but incomes will rise in both countries
what is heckscher and ohlins definition of comparative advantage?
countries have a comparative advantage in those commodities that use more intensively those factors of production which they have in abundance.
what is the leontief paradox?
the leontif paradox is that in 1953 the USA was by some margin the most capital intensive producer in the world however in a famous study by Wassily Leontief the US imports were more capital intensive then there exports
what explains the Leontief paradox?
the Us exports were more skilled-labour intensive and more engineer/science-intensive than imports and secondly the higher tech products from the USA specialise in , employ more sophisticated lightweight technologies than the heavy metal bashing low skill capital equipment than its imports embody. the measurement of capital/technology inputs is extraordinarily difficult and thus likely undervalues this component in leontiefs calculation of US exports
what is the theory of factor price equaliastion?
one important implcation of the HO model is the returns to factors of production will be in line with their employment in trade. wages will rise for workers in labour intensive export industries and rental returns will increase for investors in land intensive exports. as the price of trade goods move to an equilibrium international price, so the prices of their respective prices tend to equalise. for example if britains but more and more land intensively produced goods from US land owners then the land owners will enjoy higher and higher rents vice versa British factor workers will equally earn higher wages. following the changes of international demand and subject to mobility of the resources, land will increasingly move into agricultural employment in the Americas and labour into industrial employment in the Uk. this reallocation of resources within each trading country will continue until the factor prices equalise and there is no further incentive for land and labour to redeploy
what is the problem between factor price equalisation?
the evidence does not line up with the theory. the incomes of skilled labour have not equalised in recent years across the trading world such as between the UK and the US.
what assumptions may cause the factor price equalisation theroem to be not lining up with the evidence?
same production function for the same commodity in different countries: skilled labour is not produced and employed in the same way between different countries for example in the US they have private healthcare and in the UK they have public
factors internally mobile but internationally immboile : skilled labour can be split into many non competing groups which means restricted internal mobility of skilled labour for example farmers do not easily become doctors
will all people equally enjoy the benefits of increased international trade?
the theory predicts that incomes will rise for those factors most intensively employed in the export industries. the opposite is true for those who are employed more intensively in industries with no comparative advantage such as British agriculture. however even still complete specialisation does not occur as show by the PPF not being on the axis
where does a country operate on a PPF diagram after trade?
they operate outside their original PPF diagram which shows how the real income has increased
what are the conclusions about trade and distribution?
- There will be a redistribution of a nation’s incomes, subsequent to trade.
- Not all benefit – there are losers as well as winners.
- It requires government intervention to ensure that resources are as occupationally mobile as possible and, where that fails, that some fraction of the gains from trade are diverted to the unemployed.
- There is a sufficient rise in a country’s real income to allow winners to compensate losers and for all to gain…
what does the Samuelson-Stolpher (SS) curvre illustrate?
it illustrates the relationship beteeen the wage/rent ratio and the relative price of good A ie Pa/Pb. there is a positive relationship between the two as the greater the demand for cloth the more it will drive up the price and along with it the derived demand thus the price of that factor used most intensively in its production
what determines the steepness of the SS curve?
the gradient depends on how mobile the factors of production are
