Unit 3 Gains and Losses from Trade in Specific-Factors model (CM) PDF

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Factores específicos :Ganancias y perdidas del comercio...

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Casiano'Manrique'de'Lara'Peñate'

Chapter(Outline( •  The(Specific2Factors(Model!   The!Home!Country!   Produc9on(Possibili9es(Fron9er(   Opportunity(Cost(and(Prices!   The!Foreign!Country!

  Overall!Gains!from!Trade!

•  Earnings(of(labor(   Determina:on!of!Wages!   Equilibrium(Wage(

  Change!in!Rela:ve!Price!of!Manufactures!        

Effect(on(the(Wage( Effect(on(Real(Wages((( Overall(Impact(on(Labor((( Unemployment(((((

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Chapter(Outline( •  Earnings(of(Capital(and(Land(  Determining!the!Payments!to!Capital!and!Land!   Change(in(the(Real(Rental(on(Capital(   Change(in(the(Real(Rental(on(Land(

 Numerical!Example!   Change(in(the(Rental(on(Capital(   Change(in(the(Rental(on(Land(   General(Equa9on(for(Change(in(Factor(Prices(

 What!it!all!Means(

•  Conclusions( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Introduc9on( •  Opening(a(country(to(trade(generates(winners( and(losers.( •  Determining(who(gains(and(who(loses(answers( many(ques9ons(about(trade(poli9cs.( •  Specific7Factors'model(helps(explain(who(gains( and(who(loses.( •  Short(Run(Specific2Factor(model(offers(new( insights(beyond(the(Ricardian(model.( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Specific2Factors(Model( •  How(does(trade(affect(the(earnings(of( capital,(labor,(and(land?( •  From(the(Ricardian(model,(free(trade(leads( to:(  Rising(rela9ve(prices(in(the(export(sector(  Falling(rela9ve(prices(in(the(import(sector(

•  So(what(we(really(want(to(know(is(how( changes(in(rela:ve'prices(affect(the(earnings( of(factors( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Specific2Factors(Model( • 

Why(are(we(concerned(with(rela9ve(prices?( 1.  The(earnings(of(specific(or(fixed(factors((such(as(capital(and(land)(go(up( or(down(the(most(with(changes(in(rela9ve(prices(because(they(are( “stuck”(in(a(sector(and(cannot(be(employed(elsewhere.(( 2.  Mobile(factors((such(as(labor)(can(offset(losses(from(changes(in(rela9ve( prices(by(seeking(employment(in(other(sectors.(

• 

Will(con9nue(to(use(two(countries:(Home(and( Foreign.(

• 

Home(Country(  

Manufacturing(uses(labor(and(capital.(

 

Agriculture(uses(labor(and(land.(

 

Diminishing(returns(to(labor—decreasing(MPLM(and(MPLA((see(Figure( 3.2).(( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Specific2Factors(Model( Diminishing Marginal Product of Labor

Figure 3.2 © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Specific2Factors(Model( •  Each(country(faces(a(standard(Produc9on(Possibili9es( Fron9er.(   Concave(to(the(origin(because(of(diminishing(returns(to( labor(in(both(industries.(   Suppose(one(unit(of(L(moves(from(Agriculture(to( Manufacturing:(agricultural(output(falls(by(MPLA(and( manufacturing(output(rises(by(MPLM.(   Thus,(the(slope(of(the(PPF(is(the(nega9ve(of(the(ra9o(of(the( marginal(products((see(figure(3.3).(   The(slope(is(the(opportunity(cost(of(producing(one(unit(of( manufacturing.(

  If(L(con9nues(to(move(to(manufacturing,(MPLA(rises(and( MPLM(falls(so(the(slope(of(the(PPF(gets(steeper.( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Specific2Factors(Model( Production Possibilities Frontier Figure 3.3

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Specific2Factors(Model( •  Opportunity(Cost(and(Prices(  As(in(the(Ricardian(model,(the(slope(of(the(PPF(equals( the(opportunity(cost(or(rela9ve(price(of(the(good(on( the(horizontal(axis:(here(it(is(manufacturing.(  Firms(hire(labor(up(to(the(point(where(the(cost(of(one( more(hour(of(labor((the(wage)(equals(the(value(of(one( more(hour(of(labor(in(produc9on.(

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Specific2Factors(Model( •  Opportunity(Cost(and(Prices(  The(value(of(the(addi9onal(output(can(be( measured(by(mul9plying(the(price(of(the(good( 9mes(the(addi9onal(output,(or(the(MPL.(  This(equality(holds(for(both(industries:(

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Specific2Factors(Model( •  Since(we(assume(that(labor(is(mobile,(the(wages(in(the( two(industries(must(be(equal.( •  Rela9ve(price(of(manufacturing(equals(the(opportunity( cost(of(manufacturing((slope(of(PPF).((

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Specific2Factors(Model(

•  The(no2trade(posi9on(for(Home(is( shown(on(the(next(slide(at(point(A( •  In(equilibrium((  PM/PA(=(−(slope(of(PPF)(=(−(slope(of( indifference(curve)(  The(indifference(curve(is(tangent(to(PPF( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Specific2Factors(Model( Home Country without Trade Agriculture Output, QA

A U1

Slope = –(PM/PA)

B PPF Manufacturing Output, QM

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Specific2Factors(Model( •  The(Foreign(Country(  Assume(the(no2trade(price(in(the(foreign( country((PM*/PA*)(is(higher(than(that(in(the( Home(Country((PM/PA).((  For(now(we(will(ignore(reasons(for(price( differences.(  Home(country(has(compara9ve(advantage(in( manufacturing((can(produce(at(lower( opportunity(cost(than(Foreign(country).(( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Specific2Factors(Model( •  Overall(Gains(from(Trade(  When(trade(opens(the(world(price(will(end(up( between(the(no2trade(prices(of(the(Home(and( Foreign(countries.(  A`er(trade(   Rela9ve(Home(price(of(manufacturing(will(rise(   Rela9ve(Foreign(price(of(manufacturing(will(fall(   Total(gains(from(trade(can(be(measured(by(the(increased( u9lity(of(the(higher(indifference(curve( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Specific2Factors(Model( Home Country with Trade Agriculture Output, QA Slope = –(PM/PA)W C

Once trade is opened and consumers face the new world price, they are able to move to a higher indifference curve (U2)

U2

A

Gains from trade U1 B

Slope = –(PM/PA)

PPF Manufacturing Output, QM

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Specific2Factors(Model( •  What(has(happened(at(Home?(  The(rela9vely(higher(price(in(manufacturing(aaracts( more(workers(to(that(industry—produc9on(now(at( point(B((instead(of(A).((  Manufactured(goods(are(exported(and(Agricultural( goods(are(imported.(  Consump9on(changes(—(moving(individuals(to(a( higher(indifference(curve(allowing(them(to(now( consume(at(C((instead(of(A).(( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Specific2Factors(Model( Old production = A New production = B Old consumption = A New consumption = C

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Specific2Factors(Model(

•  Conclusions(  The(good(whose(rela9ve(price(increases( becomes(the(exported(good.(  The(good(whose(rela9ve(price( decreases(is(the(imported(good.(  A(country(can(never(be(made(worse(off( from(trade.( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Earnings(of(Labor( •  Although(a(country(as(a(whole(is(beaer(off(from(trade,( that(does(not(mean(that(every(individual(is(beaer(off.( •  How(are(earnings(of(labor(affected(in(impor9ng(and( expor9ng(industries(a`er(trade?( •  Determination of Wages   We can show the amount of labor used in each industry on one graph.

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Earnings(of(Labor( •  (Determina9on(of(Wages(   Labor(used(in(manufacturing(is(measured(from(the(le`(axis.(   Labor(used(in(agriculture(is(measured(from(the(right(axis.(   See(Figure(3.5(   Firms(hire(up(to(the(point(where(wages(equal(the(value(of(the( marginal(product.(   We(can(graph(PM(··(MPLM(and(PA(··(MPLA(in(figure(3.5.(   Note(that(PA(··(MPLA(slopes(upward(because(LA(is(measured(from( the(right.(   The(equilibrium(wage(is(at(these(curves’(intersec9on(at(point(A.( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Earnings(of(Labor( Allocation of Labor between Manufacturing and Agriculture Labor market

Wage

Wage

equilibrium

PA!MPLA

Labor Market Equilibrium is where the two curves cross

Value of marginal product of agriculture

A W PM !MPLM

Manufacturing labor

Value of marginal product of manufacturing

Agriculture labor Total labor supply

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Figure 3.5

Earnings(of(Labor( •  As(long(as(wages(are(equal(in(the(two(sectors,(there(is(no( reason(for(labor(to(move(between(sectors.( •  However,(equilibrium(can(change(as(other(factors(in(the(market( change.( •  Change(in(Rela9ve(Price(of(Manufactures(   Assume(the(rela9ve(price(of(manufactures(rises((because(of(the(foreign( demand(for(them).(   We(have(already(shown(the(shi`(from(no2trade(to(trade(equilibrium(on( the(PPF.(   Now(we(can(look(at(the(changes(in(the(wage(in(each(industry(and(how( these(changes(affect(the(real(earnings(of(labor.(   We(will(subsequently(look(at(the(real(earnings(of(land(and(capital( owners.(( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Earnings(of(Labor( •  Effect(of(Wage(  A(rise(in(rela9ve(price(of(manufacturing(can(be( caused(by(an(increase(in(PM(or(a(decrease(in(PA.(  Effect(on(real(wage(is(the(same.(  Assume(PM(rises(   PM*MPLM(curve(shi`s(up(by(Δ(PM(··(MPLM(   New(equilibrium(at(higher(wage(

 LM(has(increased(and(LA(has(decreased(   Figure(3.6( © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Earnings(of(Labor( Increase in the Price of Manufactured Goods The vertical distance between the old and new curves is greater than the increase in wages. PM*MPLM shifts up creating a new equilibrium.

Wage

Wage

Vertical distance = !PM !(MPLM) B W’

PA!MPLA

PM'!MPLM

ΔW W A

PM!MPLM

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Figure 3.6

Earnings(of(Labor( •  Effect(on(Real(Wages(   Do(higher(wages(translate(into(higher(real(wages?((Depends(on( changes(in(prices.(   We(assumed(PA(did(not(change(so(W/PA(has(increased— workers(can(buy(more(food.(   We(assume(that(PM(increased,(as(did(W;(what(is(the(net(effect( on(W/PM?((   We(showed(in(figure(3.6(that( ΔW(...