DOCSLIB.ORG

Gains from Trade Under Monopolistic Competition: a Simple Example with Translog Expenditure Functions

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Gains from Trade Under Monopolistic Competition: a Simple Example with Translog Expenditure Functions Gains From Trade under Monopolistic Competition: A Simple Example with Translog Expenditure Functions and Pareto Distributions of Firm-Level Productivity Costas Arkolakis Arnaud Costinot Andrés Rodríguez-Clare Yale and NBER MIT and NBER Penn State and NBER September 5, 2010 Abstract In this note we provide closed-form solutions for bilateral trade ‡ows and gains from trade in a model with monopolistic competition, translog expenditure functions, and Pareto distributions of …rm-level productivity. In spite of variable mark-ups, gains from trade can be evaluated in the same way as in the quantitative trade models discussed in Arkolakis, Costinot, and Rodríguez-Clare (2010). We thank Robert Feenstra for various comments and suggestions. All errors are our own. 1 Introduction In this note we provide closed-form solutions for bilateral trade ‡ows and gains from trade in a model with monopolistic competition, symmetric translog expenditure functions, and Pareto distributions of …rm-level productivity. In spite of variable mark-ups, gains from trade can be evaluated in the same way as in the quantitative trade models discussed in Arkolakis, Costinot, and Rodríguez-Clare (2010). 2 Basic Environment Our basic environment is a simple multi-country extension of the model developed by Rodríguez-López (2010) with symmetric translog expenditure functions as proposed by Bergin and Feenstra (2000, 2001) and Feenstra (2003). We consider a world economy with i = 1; :::; n countries, a continuum of goods ! , and labor as the only factor of production. 2 Labor is inelastically supplied and immobile across countries. Li and wi denote the total endowment of labor and the wage in country i, respectively. Consumers. In each country i there is a representative consumer with a symmetric translog expenditure function 1 1 ln e (pi; ui) = ln ui + + ln pi (!) d! (1) 2Mi Mi ! i Z 2 + ln pi (!) [ln pi (!0) ln pi (!)] d!0d!, 2Mi !;! i ZZ 02 where p p (!) denotes the schedule of good prices in country i; denotes the set i i ! j i f g 2 of goods available in country i; and Mi denotes the measure of this set. Firms. In each country i there is a large pool of monopolistically competitive …rms. In order to start producing …rms must hire Fi > 0 units of labor. After …xed entry costs have been paid, …rms receive a productivity level z drawn randomly from a Pareto distribution with density: b g (z) = i for all z > z. (2) i z+1 For a …rm with productivity z, the cost of producing one unit of a good in country i and selling in country j is given by cij (z) = wi ij=z, where ij 1 re‡ect bilateral (iceberg) trade costs between country i and country j. 1 3 Characterization of the Equilibrium 3.1 Firm-level variables Consider an importing country j. By Equation (1) and Shepard’s Lemma, the share of 1 1 expenditure on good ! in country j is given by + ln pj (!0) d!0 ln pj (!) , Mj Mj ! j 02 so the sales of the producer of good ! in country j are R 1 1 pj (!) qj (!) = + ln pj (!0) d!0 ln pj (!) Yj, (3) Mj Mj ! j " Z 02 !# n where qj (!) are the units of good ! sold in country j and Yj Xij is the total j=1 expenditure of country j’srepresentative consumer. P Under monopolistic competition, a …rm from country i with productivity z(!) chooses the price pj (!) at which it sells good ! in country j in order to maximize its pro…ts, pj (!) qj (!) wi ij z(!) qj (!). The …rst-order condition associated with this maximization program leads to the following pricing equation: 1 1 wi ij pj (!) = 1 + + ln pj (!0) d!0 ln pj (!) . Mj Mj ! j z (!) " Z 02 # This can be rearranged as z (!) wi ij pj (!) = e , (4) W z z (!) ij 1 1 where z wi ij exp + ln pj (!0) d!0 is a variable that summarizes mar- ij Mj Mj !0 j 2 1 ket conditions in j forh …rms from i,R and where ( )iis the Lambert function. The term z(!) W z e is the mark-up charged by …rms from i selling good ! in country j. Compare to W ij modelsh ofi monopolistic competition with CES preferences, …rms’mark-ups now vary with …rm-level productivity, z (!), and market conditions, zij . Combining the previous expression with Equation (3), we obtain the following expression for the sales, xij (z), of …rms from country i with productivity z in country j: z xij (z) = e 1 Yj. (5) W z ij 1 For all z > 0, the value of the Lambert function, (z), is implicity de…ned as the unique solution of x W xe = z. The Lambert function satis…es z > 0, zz < 0, (0) = 0 and (e) = 1; see ? for detail. W W W W 2 Since z > 0 and (e) = 1, …rms from country i export in country j if and only if z > z . W W ij Similar algebra implies that the pro…ts ij (z) of …rms from country i with productivity z in country j are given by z 1 z ij (z) = e 1 1 e Yj. (6) W z W z ij ij 3.2 Aggregate variables Bilateral Trade Flows. Let Xij denote the total value of country j’simports from country i. By de…nition, bilateral imports can be expressed as Xij = xij (!) d!, (7) ! ij Z 2 where ij ! j z (!) > z is the set of goods exported by …rms from country i in 2 j ij country j. Equations (2), (5), and (7) imply + 1 z bi Xij = Ni e 1 Yj +1 dz, z W z z Z ij ij where Ni is the measure of potential …rms in country i, i.e. those …rms which have paid the free entry costs wiFi. This measure will be endogenously determined using a free entry condition below. Using a simple change of variable, v = z=zij , and the de…nition of zij , we can rearrange the previous expression as Xij = Nibi (wi ij) exp + ln pj (!) d! Yj1, (8) Mj Mj ! j Z 2 ! + 1 where 1 1 [ (ve) 1] v dv. Summing across all exporters i = 1; :::; n and using 1 W the de…nition ofR Yj, we further get 1 exp + ln pj (!) d! 1 = . n Mj Mj ! j Nib (wi ij) Z 2 ! i=1 i Combining the two previous expressions, we obtain P Nibi (wi ij) Yj Xij = . (9) n Ni b (wi i j) i0=1 0 i0 0 0 P 3 This is what Arkolakis, Costinot, and Rodríguez-Clare (2010) refer to as the strong version of a “CES import demand system”with being the (absolute value of the) trade elasticity of that system. A similar macro-level restriction holds in Krugman (1980), Eaton and Kortum (2002), and Eaton, Kortum, and Kramarz (2010). In the rest of this note we denote by ij Xij/ Yj the share of country j’s total expenditure that is devoted to goods from country i. Measures of Potential Firms and Consumed Varieties. To solve for the measure Ni of potential …rms in country i, we now use the free entry and labor market clearing conditions. On the one hand, free entry requires that total expected pro…ts are equal to entry costs. By Equation (2), we can express this condition as n + bi 1 j=1 z ij (z) dz = wiFi. ij z+1 P R Using Equation (6) and the same change of variables as before, v = z=zij , we can rearrange the previous expression as b w F n i Y = i i , (10) j=1 z j ij 2 + P 1 1 where 2 1 [ (ve) 1] [1 (ve)] v dv. On the other hand, labor market 1 W W clearing requiresR that total costs are equal to the total wage bill. By Equation (2), we can express this condition as: n + bi 1 j=1 Ni z [xij (z) ij (z)] dz + NiwiFi = wiLi. ij z+1 P R Using Equation (5), Equation (6), and the same change of variables as before, v = z=zij , we can rearrange the previous expression as b N n i Y + w F = w L , (11) i 3 j=1 z j i i i i " ij # P + 1 1 where 3 1 [1 (ve)] v dv. Combining Equations (10) and (11) we obtain 1 W R Li Ni = . (12) 3 Fi 1 + 2 Like in a simple Krugman (1980) model, Ni is increasing in the total endowment Li of labor 4 in country i and decreasing in the magnitude of free entry costs Fi. Measure of available goods. By de…nition, the measure Mj of goods available in country n j is given by Mj = i=1 Ni bi=zij . By Equation (8) and the de…nition of zij , we also know that X = N b =z Y . Combining the two previous expressions with trade ij Pi i ij j 1 n X n X Y M n N b =z Y balance, i=1 ij = i=1 ji, we therefore have j j = i=1 j j ji i. Together 3 with Equations (10) and (12), this implies YjMj = Lj=Fj 1 + [wjFj=2]. Noting P P P 2 that Yj = wjLj by labor market clearing and simplifyingh we obtain i 1 Mj = . 2 + 3 This implies that the measure of goods available in each country is independent of labor endowments and trade costs, and hence is the same in all countries.
Load more

Recommended publications
  • A Patchwork Planet 29
    patchwork A planet beneficial co-operation of governance. If so, you are likely find- The Covid-19 crisis has exposed the ing the coronavirus crisis even more depressing. From Donald arbitrary way in which we have stitched Trump’s branding of the disease as a specifically “Chinese virus” and his defunding of the World Health Organisation (WHO), to globalisation together. It’s time to go the violation of rules about sharing medical data and an unseemly back to first principles, and tailor a new scramble to secure masks and ventilators amid unilateral export restrictions, there is scant sign of global harmony just now. set of international rules around them The irony, of course, is that at the same time the virus risks setting globalisation (as we have conventionally understood it) spinning into reverse, it is also affirming anew our shared fate dani rodrik as human beings. That might seem like a paradox, but in fact our present-day globalisation is not and never has been the only way—or the best way—of meshing together our economies and other interests. And it is not only scholars in ivory towers who are wondering if this is a moment for a reset. hat do you think of when you hear the word “glo- President Macron of France is both a determined economic balisation?” It might well be the usual newspa- liberal and former investment banker, and yet he used a major per illustration—the container ship that moves interview with the Financial Times in April to concede that amid merchandise round the world.
    [Show full text]
  • Trade Policy and Imperfect Competition
    CAVE.6607.cp12.p203-226 6/6/06 11:21 AM Page 203 CHAPTER 12 Trade Policy and Imperfect Competition n this chapter the focus on trade policy shifts in two ways. We depart from the assumption that markets for goods, services, and factors of production are purely Icompetitive and allow for elements of monopoly and oligopoly. The effects of these market structures are studied mainly in individual markets (partial equilibrium) rather than in the economy as a whole (general equilibrium). Second, because many practical issues of trade policy, both old and new, turn on imperfect competition, we align the theory closely with its empirical applications. 12.1 Monopoly and the Gains from Trade The most basic connection between imperfect competition and international trade lies in the ability of international competition to limit distortions caused by monopolies in a nation’s product markets.We show this theoretically; then we consider evidence from real-world markets. Monopoly and Import Competition “The tariff is the mother of the trusts” was a charge heard often in the United States at the end of the nineteenth century. It meant that domestic producers who had worked out collusive agreements among themselves could not raise prices and exploit con- sumers without help from tariffs, which kept import competition away. Indeed, the gains from trade are amplified when foreign competition undercuts a monopoly’s abil- ity to raise its price above long-run marginal cost (the benchmark for an efficient, competitive price). This is illustrated in Figure 12.1, which shows not the monopoly’s demand and cost curves but the effect of its behavior on resource allocation for the economy as a whole.
    [Show full text]
  • Volatility and the Gains from Trade
    NBER WORKING PAPER SERIES VOLATILITY AND THE GAINS FROM TRADE Treb Allen David Atkin Working Paper 22276 http://www.nber.org/papers/w22276 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2016 We thank Costas Arkolakis, Kyle Bagwell, Dave Donaldson, Jonathan Eaton, Marcel Fafchamps, Pablo Fajgelbaum, Sam Kortum, Rocco Machiavello, Kiminori Matsuyama, John McLaren, Steve Redding, Andres Rodriguez-Clare, Esteban Rossi-Hansberg, Chang-Tai Hsieh, Andy Skrzypacz, Jon Vogel and seminar participants at Columbia University, George Washington University, Harvard University, the NBER ITI Winter Meetings, Pennsylvania State University, Princeton University, Princeton IES Summer Workshop, Purdue University, Stanford University, University of British Columbia, University of California - Berkeley, University of California - Davis, University of North Carolina, University of Toronto, and University of Virginia. We thank Scott Fulford for kindly providing the rural bank data we use. Rodrigo Adao, Fatima Aqeel, Masao Fukui, Annekatrin Lüdecke, and Yuta Takahashi provided exceptional research assistance. Part of this paper was completed while Allen was a visitor at the Stanford Institute for Economic Policy Research (SIEPR), whose hospitality he gratefully acknowledges. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2016 by Treb Allen and David Atkin. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
    [Show full text]
  • Gains from Trade When Firms Matter
    Journal of Economic Perspectives—Volume 26, Number 2—Spring 2012—Pages 91–118 Gains from Trade when Firms Matter Marc J. Melitz and Daniel Trefl er hhee ggainsains ffromrom llong-distanceong-distance iinternationalnternational ttraderade hhaveave bbeeneen uunderstoodnderstood aandnd eexploitedxploited ssinceince pprehistoricrehistoric ttimes.imes. OOurur ppre-urbanre-urban aancestorsncestors wwereere bbenefienefi t-t- T ttinging ffromrom llong-distanceong-distance ttraderade iinn oobsidianbsidian ssomeome 10,00010,000 yyearsears aago;go; PPlato’slato’s AAcademycademy wwasas bbuiltuilt oonn tthehe pprofirofi tsts ofof AthenianAthenian silversilver exports;exports; andand RomeRome waswas notnot builtbuilt iinn a ddayay ppartlyartly bbecauseecause ggoodsoods mmovedoved ttoooo sslowlylowly iinn tthehe vvastast RRomanoman ttraderade nnetwork.etwork. BButut wwhereashereas ttraderade wwasas ooncence ddominatedominated bbyy tthehe mmovementovement ooff ggoodsoods tthathat ccouldould oonlynly bbee pproduced,roduced, hharvested,arvested, oorr mminedined rregionally,egionally, tthehe internationalinternational tradetrade landscapelandscape iiss nnowow ddominatedominated bbyy ttwowo sstrikingtriking facts.facts. TheThe fi rstrst isis thethe riserise ofof intra-industryintra-industry trade—trade— tthathat iis,s, ttwo-waywo-way ttraderade iinn ssimilarimilar pproducts.roducts. CChinesehinese cconsumersonsumers ccanan nnowow bbuyuy a mmidsizeidsize ccarar ffromrom TToyotaoyota ((Japan),Japan), KiaKia ((Korea),Korea), GGeneraleneral MotorsMotors (United(United
    [Show full text]
  • Ma Finalsemester Subject Code: Maeco502 International Economics
    1 M.A (ECONOMICS) MA FINALSEMESTER SUBJECT CODE: MAECO502 INTERNATIONAL ECONOMICS 2 BOARD OF STUDIES 1. Prof. S.K Nayak Head Chairman (Ex-officio) Dept. of Economics, RGU Member 2. Prof. A. Mitra Dept. of Economics, RGU Member 3. Prof. (Ms.) V. Upadhyay Dept. of Economics, RGU Member 4. Prof. N.C Roy Dept. of Economics, RGU Member 5. Prof. M P Bezbaruah Dept. of Economics, Guwahati University, Guwahati Member 6. Dr. RajuMondal Dept. of Economics, Assam University, Silchar, Assam Member Secretary 7. Dr. LijumNochi Dept. of Economics, RGU Authors: - Prof. S.K. Nayak, Dept. of Economics, RGU & Dr. R.K. Mandal, Dept. of Economics, DNGC, Itanagar (Unit: I & II) Prof. S.K. Nayak, Dept. of Economics, RGU & Dr. A.I. Singh, Dept. of Economics, DNGC, Itanagar (Unit: II & X) Dr. Lijum Nochi & Mr. Nyage Riba, Dept. of Economics, RGU (Unit: IV & V) Dr. D.B. Gurung, Dept. of Economics, RGU (Unit: VI, VII & VIII) Dr. Kaju Nath, NIT, Agartala (Unit: IX) 3 SYLLABI-BOOK MAPPING TABLE PAPER NO: MAECO502 INTERNATIONAL ECONOMICS SYLLABI Mapping in Book UNIT- I: COMPARATIVE COST AND OPPORTUNITY COST MODELS Ricardo’s Model of Comparative Advantages - Modified Ricardian Theory (Elaboration and Refinement) - Haberler’s Opportunity Cost Theory - Trade under Increasing, Decreasing And Constant Cost Conditions UNIT-II: TRADE, FACTOR ENDOWMENTS AND FACTOR PRICE Leontief Paradox - Stolper-Samuelson Theorem: Factor Price Equalization Theorem - International Trade and Imperfect Competition UNIT- III: TERMS OF TRADE Meaning of Terms of Trade UNIT-IV: TARIFF Arguments
    [Show full text]
  • MARKUS BRUNNERMEIER Twitter: @Markuseconomist Markus’ Intro
    Intro: MARKUS BRUNNERMEIER Twitter: @MarkusEconomist Markus’ intro . Previous/future webinars . Michael Kremer: Vaccine development . Penny Goldberg: Global value chains . Daron Acemoglu: On the benefits of targeted policies . Speakers bcf.Princeton.edu bcf.Princeton.edu Website: http:// World Order Rule/institution based Outcome based . Predictability . Flexibility . in a complex world . Limits reactions to shocks . Less symmetric . Fewer -ve feedback loops . Less stable . Trade wars . Currency wars 5/4/2020 3 World Order Rule/institution based Outcome based . Predictability . Flexibility . in a complex world . Limits reactions to shocks . Less symmetric . Fewer -ve feedback loops . Less stable . Trade wars . Currency wars . UN, WTO, IMF, WorldBank, . Regional blocks 5/4/2020 4 World Order Rule/institution based Outcome based . Predictability . Flexibility . in a complex world . Limits reactions to shocks . Less symmetric . Fewer -ve feedback loops . Less stable . Trade wars . Currency wars . Rule based maybe in large countries best interests: . Control internal politics (national champions, etc.) . can shape the rules . Rule shaping may lead to “blocks” 5/4/2020 5 Economic order . Challenge: what are the rules . necessary to ensure the functioning of the system . that reflect (diverging) national preferences & identity . Areas . Intellectual property, patents . Competition . Health, phytosanitary . GMOs, chlorinated chicken . Environmental / social standards . Privacy . Enforcement (?) 5/4/2020 6 Geopolitics & Economics . Summers (2004) “balance of financial terror” . Create Interdependence/loss of autonomy (via e.g. global value chains) . Forces interaction convergence to common values . Flows of ideas/people makes wars more costly . Common threats . … BUT . Less diversity . Less regional experimentation . Loss of identity (Grossman-Helpman, 2019) . Resilience . Depends on whether symmetric global shock or regional shock 5/4/2020 7 Geopolitics & Globalization .
    [Show full text]
  • Imperfect Competition and Increasing Returns to Scale I: Notes7.Pdf 1
    Imperfect Competition and Increasing Returns to Scale I: notes7.pdf 1 This is the first of two sets of notes on increasing returns to scale and imperfect competition as a source of trade and gains from trade (Ch11) This set focuses on homogeneous goods (firms produce identical products). The principal ideas are: (1) trade can offer opportunities and gains even for identical countries: a pattern of comparative advantage need not exist. (2) efficiency gains: by specializing in producing only one good for the whole world, each country becomes more productive. (3) scale economies are associated with imperfect competition, and hence trade allows for pro-competitive gains from trade. General idea behind production efficiency (productivity) gains: 2 In autarky, each country divides is resources between both goods, and hence the average cost of production is high (productivity is low). With trade, each country can focus on a single good, and hence the average cost of each good falls, more is produced from a given among of factors, and a surplus is created. General idea behind pro-competitive gains: As we will see, increasing returns is inevitably associated with imperfect competition and prices above marginal cost. Trade induces more competition and hence more output and lower prices. 3 Another way to think about this is as a classic Prisoners' Dilemma game. Suppose that each firm makes profits of 10 in autarky. When trade is opened up, each firm has the choice between holding it quantity at the autarky level or increasing quantity. This game has the following payoff matrix, where the first number is the profits of the home firm, and the second number is the profits of the foreign firm.
    [Show full text]
  • Economies of Scale and International Trade
    Economies of scale and international trade • In the models discussed so far, differences in prices across coun- tries (the source of gains from trade) were attributed to differ- ences in resources/technology. Countries specialize in the things they do relatively well (produce inexpensively). • All these models were characterized by constant returns to scale technologies and perfectly competitive markets. • Not all commodity markets exhibit purely competitive behavior. Moreover, the phenomenon of intra-industry trade cannot be ex- plained with models based on perfect competition. • We will therefore look at imperfect market structures, particu- larly at a model with monopolistic competition where there are scale effects in production that provide an explanation for interna- tional trade patterns going beyond the relevance of asymmetries in technologies or factor endowments. Two types of economies of scale • By economies of scale (EOS) we refer to the fact that the unit costs decrease with the scale of production. This implies the following regarding production and pattern of trade: It pays of to specialize in relatively few goods in order to achieve large scale of production. • Internal economies of scale: the size of the individual firm matters, i.e. larger firms have a cost advantage over smaller firms. • External economies of scale: the size of the industry matters. A firm trying to expand will face increasing costs, but as the industry as a whole expands, the costs of the individual firms are lowered. • These two types of EOS have different implications for market structure: – An industry with purely external EOS typically consists of many small firms that perfectly compete with each other.
    [Show full text]
  • Topic 3: the Ricardian (Classical) Trade Model
    Topic 3: the Ricardian (Classical) trade model Ricardian model: introduction This will be our first theoretical model that explains our basic questions: What do countries trade? (comparative advantage) What are the gains from trade (GFT)? Do both (all) countries GFT? Before starting the model, let’s consider three (false) common propositions you may hear about international trade. The first two: (1) “Wealthy, high-wage countries cannot afford to trade with low-wage developing countries because their low wage costs would allow them to produce most goods more cheaply and drive firms in richer countries out of business.” We need protection from low-wage imports to avoid seeing our wages brought down to their level. (2) “Low-wage developing countries cannot afford to trade with high-wage countries because labor in those countries is so much more productive because of skills, capital, and technological superiority that they would produce most goods more cheaply and drive LDC firms out of business.” Ricardian model: introduction Which is it? They can’t both be true, even though both are commonly heard in the media and policy circles. The fallacy with both is that they look at only one component of production costs: wages on the one hand and productivity on the other. But productivity and wages (also exchange rates, capital costs, and many other factors) combine to determine unit costs. The US can trade with Mexico or Vietnam to our mutual advantage, because we’re much better at producing some goods (better enough to pay for the high wages) and only a little better at others, so low wages matter there.
    [Show full text]
  • Introduction to "Empirical Studies of Strategic Trade Policy"
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Empirical Studies of Strategic Trade Policy Volume Author/Editor: Paul Krugman and Alasdair Smith, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-45460-6 Volume URL: http://www.nber.org/books/krug94-1 Conference Date: October 13-14, 1989 Publication Date: January 1994 Chapter Title: Introduction to "Empirical Studies of Strategic Trade Policy" Chapter Author: Paul R. Krugman Chapter URL: http://www.nber.org/chapters/c8673 Chapter pages in book: (p. 1 - 10) Introduction Paul Krugman The papers in this volume represent the latest stage in an ongoing research project that has occupied international economists around the world for more than a decade. The project is the reconstruction of international trade theory to take account of increasing returns and imperfect competition; it is a project that has increasingly focused on the problem of quantification, of making the models operational. In this introduction I will try to put the research reported in this volume in context. I begin with a brief review of the origins of the concept of strategic trade policy, then turn to a summary of the results of earlier quantitative work, and finally summarize some of the key points raised in this volume. The Concept of Strategic Trade Policy The revolution that swept through the theory of international trade in the first half of the 1980s-the rise of the so-called new trade theory’-left many of the insights of traditional trade theory intact.
    [Show full text]
  • IR213 Lecture 4 Distributing the Gains from Trade
    Lecture 4: Terms of Trade Benjamin Graham Lecture 4: Terms of Trade Benjamin Graham Today’s Plan • Housekeeping • Reading quiz • Finish up comparative advantage lecture • Terms of Trade • Winners and Losers Between Countries • 4 sessions on the economics of trade, 4 sessions on the politics of trade. ! • Birdsall: part today, part tomorrow Lecture 4: Terms of Trade Benjamin Graham Housekeeping • Homework 1 due next Thursday (Sept. 11) • Beginning of Class. Late papers not accepted. ! • How to write a good quiz question • CC Josh when you send those [email protected] Lecture 4: Terms of Trade Benjamin Graham Reading Quiz (1) • According to your textbook (and modern economic theory generally), the terms of trade tend to favor: • A. Countries with large economies over countries with small economies • B. Countries with smaller economies over countries with larger economies • C. Militarily powerful countries over militarily weak countries • D. Members of the WTO over non-members Lecture 4: Terms of Trade Benjamin Graham Reading Quiz (2) • Commodity terms of trade measures the relationship between ! • A. The balance of trade between a country's imports and exports. • B. The prices a nation gets for its exports and the prices it pays for its imports. • C. The value added to a good or service. • D. The price of commodities and GDP. Lecture 4: Terms of Trade Benjamin Graham Reading Quiz (3) • According to Birdsall, one group of countries that has been open to trade, but nonetheless has not enjoyed growth is: • A. Countries that are militarily weak • B. Countries in SE Asia • C. Countries in Latin America • D.
    [Show full text]
  • Ricardian Model – Part 1
    Lecture 2a: Ricardian Model – part 1 Thibault FALLY C181 – International Trade Spring 2018 In this chapter we will examine the following topics: • Brief summary of reasons to trade and specialize • Brief history of Ricardian model • Ricardian model In this chapter we will examine the following topics: • Brief summary of reasons to trade and specialize • Brief history of Ricardian model • Ricardian model: • PPF • Autarky equilibrium • Export patterns • Wages • International prices • Equilibrium with international trade • Gains from trade in the Ricardian model 1 Reasons for Trade Reasons countries trade with each other include: ■ Differences in the technology used in each country ■ Differences in the total amount of resources (including labor, capital, and land) ■ Differences in tastes ■ Imperfect competition, product differentiation 1 Reasons for Trade Reasons countries trade more with some countries than others include: ■ Proximity of countries to each other ■ Low communication/coordination costs ■ Low bilateral tariffs and FTA, etc. 1 Reasons for Trade Resources • Natural resources (e.g. land and minerals) - Includes energy resources (e.g. coal, petroleum) • Labor resources (by skill level) • Capital (machinery and structures) Vocabulary: Resources = “Factors of production” = “Endowments” 1 Reasons for Trade Technology? Two aspects: • Absolute advantage When a country has the best technology for producing a good. • Comparative Advantage A country has a comparative advantage in producing those goods that it produces best compared with
    [Show full text]