Trade and Wages

Question 1

What does the Ricardian Model predict about the link between trade and income?

Answer 1

• Country as a whole is better off with trade
• Everyone is the same so everyone gains

Question 2

What does the HO Model predict about the link between trade and income?

Answer 2

Country as a whole is better off, but what about individuals?
Goods prices <-> Factor prices
- changes in goods prices due to trade will lead to changes in factor prices

Question 3

Consider Ireland in autarky. It makes two goods:
Pharma (r) is high-skill intensive: 1 high-skill worker for 1 low-skill.
Textiles (t) are low-skill intensive: 1 HS worker for 5 LS workers.
Open for trade with China, a low-skill abundant country.
What happens to prices in Ireland?

Answer 3

H.O Theorem => (Pr/Pt) IE < (Pr/Pt) CH => prices converge to get Pr w/Pt
As Pr/Pt rises in Ireland, want to specialize in pharma
- Need to move both HS and LS workers to pharma
- Price of pharma in Ireland increases
- Want to increase pharma production
- Need HS and LS workers but not at the same intensity
- Since pharma is HS intensive, at current wages, leaves some LS workers unemployed
This drives down their wages
Pr/Pt rise leads to a rise in World HS / World LS (Whs/Wls)

Question 4

What is the Stolper Samuelson Theorem?

Answer 4

An increase in the relative price of a good increases the relative wage of the factor it uses intensively
- and reduces the relative wage of its non-intensive factor
Factor Prices -> Goods Prices -> Tech

Question 5

What does the Ryb theory look at?

Answer 5

Output -> Tech -> Endowment

Question 6

What does the H.O. model look at?

Answer 6

Prices -> Tech -> Endowment

Question 7

What is Pareto Efficiency?

Answer 7

The only way to benefit someone is to make someone else worse off
Trade is a Pareto Improvement if we redistribute
- Identify who gained from trade
- Identify who lost from trade
- Get tax implemented

Question 8

What are three things to look out for when doing regression analysis?

Answer 8

• Sign: Positive/Negative
• Statistical Significance: how sure you are that it isn’t a zero effect (the more * - stars the more sure that the data isn’t a zero effect).
• Economic Significance: how large the effect is

Question 9

The New Trade Theories

Answer 9

• Better to work for an exporter
• Most gains among high-skill in Global North
• Selection effect shifts resources to the most productive firms
• More productive firms also tend to pay higher wages
  . exporter wage premium @ 12%