DOCSLIB.ORG

University of Lille, 23-25Th May 2019)

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
University of Lille, 23-25Th May 2019) Christoph Gelbhaar [email protected] Sonderburger Straße 105, 68307 Mannheim, Germany 0049 176 528 29 180 Working Paper for the 23rd Annual Conference of the European Society for the History of Economic Thought (University of Lille, 23-25th May 2019) A tradition of conceptual confusion in the history of international trade theory 1 << If there were an Economist‘s creed, it would surely contain the affirmations “I understand the principle of comparative advantage” and “I advocate Free Trade.” >> << From the early nineteenth century until the late 1970s, international trade theory was dominated almost entirely by the concept of comparative advantage(…). >>1 To explain and contextualize the achievements of their ‘New Trade Theory,’ economists like Paul Krugman use statements like these. The history of scientific theory concerning international trade is divided in two parts, with their own theoretical contributions being the dividing event: From David Ricardo to the later 20th century, the whole theory of international trade was dominated by and built around the concept of comparative advantage. But this undue dominance has ended, they tell us. It ended when the ‘New Trade Theory’ gave us formal models of non-comparative advantage trade due to increasing returns to scale.2 The premise of this account is hardly controversial; nor should it be. Economists have long been exaggerating the degree to which a mere understanding of the concept of comparative advantage, when combined with factual knowledge on the actual pattern of comparative advantages, had been enabling them to explain and predict the contents and directions of the flows of international trade. And they have certainly been exaggerating the degree to which the mere initiation into the concept of comparative advantage had to be equated with an introduction into an established truth concerning economic policy, that is, an insight into the superiority of free trade. But what, precisely, has been the nature of this exaggeration? Krugman sees it as a matter of omission and emphasis. In his account, economists had always understood that the impact of increasing returns to scale on trade was something that their models of comparative advantage had not fully captured. But since, originally, they weren’t able to model this other factor of influence on trade gains and trade patterns, they simply omitted it in their textbooks. They only incorporated what they could model: comparative advantage trade. 1 Krugman, Paul R.: Is Free Trade passé?, in: The Journal of Economic Perspectives 1 (1987), Nr. 2, p. 131-144, here: p. 131 and 132. 2 This is ‘work in progress,’ a conference working paper for the sole purpose of facilitating discussion of the author’s presentation at the ESHET gathering in Lille in May 2019. However, please feel invited to share your thoughts. Please feel free to contact the author using this address: [email protected]. The author would be especially interested in learning about ESHET members who are publishing on the same subject or related subjects in other languages. 2 So his account contains two hypotheses, one factual and one causal. Firstly, the exaggeration appears to be mainly a thing of the past that has been overcome, that has already been eliminated in modern textbooks. And secondly, it has supposedly been overcome by the same progress of scientific knowledge that created it: International trade theory has followed “the path of least mathematical resistance,” progressing naturally from the simpler models of comparative advantage to the New Trade Theory after the latter had been made possible by new models of ‘imperfect competition.’3 But the end result of this supposedly continual scientific evolution has been a change in political implications, though a rather limited one. Together with the accumulating knowledge on the political economy of trade policy, the New Trade Theory is still providing a lot of weighty arguments against protectionism. But the status of free trade, according to Krugman, has “shifted from optimum to reasonable rule of thumb. There is still a case for free trade as a good policy, and as a useful target in the practical world of politics, but it can never again be asserted as the policy that economic theory tells us is always right.”4 By implication, the concept of comparative advantage should have lost most of its special status as well. For an ‘Economist’s creed’ that equates initiation into this concept with an insight into the optimality of a certain policy is not in line with the state of professional knowledge anymore. As a matter of course, the insight that survival in international competition does not necessarily depend on absolute cost advantages remains of the utmost importance. It still is, or rather could be and should be, a powerful pedagogical weapon against the most vulgar versions of protectionist demagoguery. 3 Krugman, Paul R.: Rethinking International Trade, Cambridge (Ma.) 1990, p. 3-4: „(…) [O]ne may wonder why it took so long for the new theory to emerge. The main answer is that while trade based on increasing returns is easy to talk about in a general sense, it is difficult to model formally. Since economics as practiced in the English-speaking world is strongly oriented toward mathematical models, any economic argument that has not been expressed in that form tends to remain invisible. While many economists no doubt understood that increasing returns could explain international trade even in the absence of comparative advantage, before 1980 there were no clean and simple models making the point. As a result this idea was often simply left out of textbooks and trade courses, and even good trade theorists often seemed unaware of the possibility. (…) The long dominance of Ricardo over Smith - of comparative advantage over increasing returns – was largely due to the belief that the alternative was necessarily a mess. In effect, the theory of international trade followed the perceived line of least mathematical resistance. Once it was clear that papers on noncomparative-advantage trade could be just as tight and clean as papers in the traditional mold, the field was ripe for rapid transformation.” 4 Krugman, Is Free Trade passé?, p. 132. 3 But the concept’s perceived status relative to less crude versions of protectionism should now basically equal the status of the concept of increasing returns. While generally considered to be a major reason for the mutual profitability of trade, increasing returns are also and have always been the key ingredient in sophisticated arguments for the potential desirability of protectionism under specific conditions. Comparative advantages can now be assigned to the same role. Take, for example, the model of ‘External Economies and Specialization’ in Krugman’s and Obstfeld’s bestselling textbook. This model aims to explain a theoretically valid argument for infant industry protection: A fully established industry residing in a comparatively disadvantaged country can nevertheless survive, due simply to the early start that it enjoyed relative to its potential competitors, for the externality of localized economies of scale in this industry will discourage any new individual investment in other countries that would otherwise be advantaged, be it absolutely or comparatively. But this means that, technically, unused comparative advantages can provide an additional argument for infant industry protection: According to the model, if the aim is to maximize both global productivity and national welfare by redirecting international trade so that it will eventually conform to the pattern of comparative advantage, this aim might then call for a protectionist policy. But as a matter of fact, economists still represent the introduction into the concept of comparative advantage as a provision of an insight into the wisdom of free trade, while assigning other textbook contents to the role of the qualifications. The concept’s special status remains intact. And this shows why Krugman’s account of the history of the discipline should indeed be controversial, both with respect to the supposedly achieved elimination of international trade theory’s undue domination by the concept of comparative advantage and with respect to the factors that have ostensibly sustained and ended this domination. And though criticism of the account is usually not explicit, neither is it rare. It usually takes the form of papers or statements criticizing the “theory of comparative advantage,” a theory that is supposedly the core of a textbook orthodoxy on the subject of international trade – a currently dominating orthodoxy, not one of the past. Although the theory is usually criticized without being precisely defined beforehand, it is clear enough what its content is thought to be: It is vaguely understood as the postulate that the contents and directions of the flows of 4 international trade are generally determined by the patterns of comparative advantage, and that this clearly points to free trade as an optimal economic policy. In this alternative view, the traditional exaggeration has not yet been overcome. Its elimination is still to be achieved, which is precisely what the critics of the “theory” understand to be the purpose of their critical efforts. And this “theory” is not just a straw man, put up by the critics of textbook orthodoxy to inflate the importance of their contribution. A “theory of comparative advantage” is actually mentioned in many of the criticized textbooks, as a theory that is generally valid and that has been proven by David Ricardo in 1817. Some even call it the “law of comparative advantage.” The description of that supposed law usually contains not more than an explanation of the concept of comparative advantage, plus sometimes a description of one of the mechanisms that can turn comparative cost advantages into absolute price advantages. But the law is nevertheless presented as “one of the most important laws in economics” (as, for example, in Dominick Salvatore’s “International Economics.
Load more

Recommended publications
  • Underdevelopment and Unregulated Markets: Seven Reasons Why Unregulated Markets Reproduce Underdevelopment
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Herr, Hansjörg Working Paper Underdevelopment and unregulated markets: Seven reasons why unregulated markets reproduce underdevelopment Working Paper, No. 103/2018 Provided in Cooperation with: Berlin Institute for International Political Economy (IPE) Suggested Citation: Herr, Hansjörg (2018) : Underdevelopment and unregulated markets: Seven reasons why unregulated markets reproduce underdevelopment, Working Paper, No. 103/2018, Hochschule für Wirtschaft und Recht Berlin, Institute for International Political Economy (IPE), Berlin This Version is available at: http://hdl.handle.net/10419/178653 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Key words: underdevelopment, financial system, free trade, inequality, Keynesian paradigm, Washington Consensus. JEL classification: B50, F40, O11 Contact: Hansjörg Herr email: [email protected] 1.
    [Show full text]
  • Trade and Employment Challenges for Policy Research
    ILO - WTO - ILO TRADE AND EMPLOYMENT CHALLENGES FOR POLICY RESEARCH This study is the outcome of collaborative research between the Secretariat of the World Trade Organization (WTO) and the TRADE AND EMPLOYMENT International Labour Office (ILO). It addresses an issue that is of concern to both organizations: the relationship between trade and employment. On the basis of an overview of the existing academic CHALLENGES FOR POLICY RESEARCH literature, the study provides an impartial view of what can be said, and with what degree of confidence, on the relationship between trade and employment, an often contentious issue of public debate. Its focus is on the connections between trade policies, and labour and social policies and it will be useful for all those who are interested in this debate: academics and policy-makers, workers and employers, trade and labour specialists. WTO ISBN 978-92-870-3380-2 A joint study of the International Labour Office ILO ISBN 978-92-2-119551-1 and the Secretariat of the World Trade Organization Printed by the WTO Secretariat - 813.07 TRADE AND EMPLOYMENT CHALLENGES FOR POLICY RESEARCH A joint study of the International Labour Office and the Secretariat of the World Trade Organization Prepared by Marion Jansen Eddy Lee Economic Research and Statistics Division International Institute for Labour Studies World Trade Organization International Labour Office TRADE AND EMPLOYMENT: CHALLENGES FOR POLICY RESEARCH Copyright © 2007 International Labour Organization and World Trade Organization. Publications of the International Labour Office and World Trade Organization enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated.
    [Show full text]
  • Standard Theory (Hybrid Heckscher-Ohlin/New Trade Theory) Does Not Well When Matched with the Data on the Growth and Composition of Trade
    Standard theory (hybrid Heckscher-Ohlin/New Trade Theory) does not well when matched with the data on the growth and composition of trade. In the 1980s and 1990s trade economists reached a consensus that North-North trade — trade among rich countries — was driven by forces captured by the New Trade Theory and North-South trade — trade between rich countries and poor countries — was driven by forces captured by Heckscher-Ohlin theory. (South-South trade was negligible.) A. V. Deardorff, “Testing Trade Theories and Predicting Trade Flows,” in R. W. Jones and P. B. Kenen, editors, Handbook of International Economics, volume l, North-Holland, 1984, 467-517. J. Markusen, “Explaining the Volume of Trade: An Eclectic Approach,” American Economic Review, 76 (1986), 1002-1011. In fact, a calibrated version of this hybrid model does not match the data. R. Bergoeing and T. J. Kehoe, “Trade Theory and Trade Facts,” Federal Reserve Bank of Minneapolis, 2003. TRADE THEORY Traditional trade theory — Ricardo, Heckscher-Ohlin — says countries trade because they are different. In 1990 by far the largest bilateral trade relation in the world was U.S.-Canada. The largest two-digit SITC export of the United States to Canada was 78 Road Vehicles. The largest two-digit SITC export of Canada to the United States was 78 Road Vehicles. The New Trade Theory — increasing returns, taste for variety, monopolistic competition — explains how similar countries can engage in a lot of intraindustry trade. Helpman and Krugman (1985) Markusen (1986) TRADE THEORY AND TRADE FACTS • Some recent trade facts • A “New Trade Theory” model • Accounting for the facts • Intermediate goods? • Policy? How important is the quantitative failure of the New Trade Theory? Where should trade theory and applications go from here? SOME RECENT TRADE FACTS • The ratio of trade to product has increased.
    [Show full text]
  • 1. Falling International Trade Costs
    II D TRADE,THELOCATIONOFPRODUCTIONANDTHEINDUSTRIALORGANIZATIONOFFIRMS DTRADE, THE LOCATION OF PRODUCTION AND THE INDUSTRIAL ORGANIZATION OF FIRMS Section C has explored the possible reasons why A common denominator in both these phenomena countries trade and highlighted how different is the role of trade costs. Reduction in trade costs modelling approaches, based on comparative can be an important cause of both agglomeration advantages or on economies of scale, explain and fragmentation. But the extent to which they are different types of trade: inter-industry trade among compatible has not yet been explored in economic different countries and intra-industry trade among literature. On the one hand, the new economic similar countries. Traditional trade models and the geography literature predicts that a fall in trade so-called “new” trade theory models can predict costs will lead to an initially greater geographical which countries will specialize in the production of concentration of production and a subsequent certain goods and how many varieties of the same reduction of concentration as trade costs fall to a product they will exchange. However, they cannot sufficiently low level. On the other hand, recent predict the location decisions of firms. Further, theories of fragmentation predict that a reduction they assume that production takes place within the in trade costs will lead to greater fragmentation of boundaries of the firm. Therefore, they can neither production, with firms geographically spreading the explain why production is not randomly distributed different stages of their production process. Much in in space nor what determines the decision of a firm the same way as high trade costs in trading final goods to outsource.
    [Show full text]
  • 1 New Trade Theory
    Increasing Returns to Scale 1 New Trade Theory According to traditional trade theories (Ricardian, spe- ci…c factors and HOS models), trade occurs due to exist- ing comparative advantage between countries (technol- ogy, factor endowment di¤erences). Empirical data shows a signi…cant amount of trade occurs between similar countries, countries with similar technol- ogy and similar factor endowments. With little di¤erence to exploit, these countries should have little to gain from trade, yet seem to have prospered from trading with each other. Given this “unexplainable” portion of trade, trade theo- rists began to look for other reasons for trade, reasons where trade could occur between similar countries and yield sizable gains from trade. The shift in emphasis from looking for reasons for trade to occur between di¤erent countries to looking for reasons for trade to occur between similar countries marks the break between the traditional (old) trade theory and the new trade theory. Newer theories still generally can be interpreted as having trade stem from some type of comparative advantage, but the source of comparative advantage is more subtle, and sometimes does not even existent in autarky, but develops with the opening up to trade. The hallmark of the new theories is that one can construct a scenario where exactly identical countries will trade with each other. Some of the new reasons for trade are increasing re- turns to scale (IRS), imperfect competition (especially oligopoly), and di¤erentiated goods (variety or quality). As we study each of these models, ask: 1. What failures of the traditional theory motivated construction of this model? 2.
    [Show full text]
  • 14.581 Lecture 9: Increasing Returns to Scale and Monopolistic Competition: Theory
    14.581 MIT PhD International Trade – Lecture 9: Increasing Returns to Scale and Monopolistic Competition (Theory) – Dave Donaldson Spring 2011 Today’s Plan 1 Introduction to “New” Trade Theory 2 Monopolistically Competitive Models 1 Krugman (JIE, 1979) 2 Helpman and Krugman (1985 book) 3 Krugman (AER, 1980) 3 From “New” Trade Theory to Economic Geography “New” Trade Theory What ’s wrong with neoclassical trade theory? In a neoclassical world, differences in relative autarky prices– due to • differences in technology, factor endowments, or preferences– are the only rationale for trade. This suggests that: • 1 “Different” countries should trade more. 2 “Different” countries should specialize in “different” goods. In the real world, however, we observe that: • 1 The bulk of world trade is between “similar” countries. 2 These countries tend to trade “similar” goods. “New” Trade Theory Why Increasing Returns to Scale (IRTS)? “New” Trade Theory proposes IRTS as an alternative rationale for • international trade and a potential explanation for the previous facts. Basic idea: • 1 Because of IRTS, similar countries will specialize in different goods to take advantage of large-scale production, thereby leading to trade. 2 Because of IRTS, countries may exchange goods with similar factor content. In addition, IRTS may provide new source of gains from trade if it • induces firms to move down their average cost curves. “New” Trade Theory How to model increasing returns to scale? 1 External economies of scale Under perfect competition, multiple equilibria and possibilities of losses • from trade (Ethier, Etca 1982). Under Bertrand competition, many of these features disappear • (Grossman and Rossi-Hansberg, QJE 2009).
    [Show full text]
  • Oecd Development Centre
    OECD DEVELOPMENT CENTRE Working Paper No. 16 (Formerly Technical Paper No. 16) COMPARATIVE ADVANTAGE: THEORY AND APPLICATION TO DEVELOPING COUNTRY AGRICULTURE by Ian Goldin Research programme on: Changing Comparative Advantage in Food and Agriculture June 1990 TABLE OF CONTENTS SUMMARY . 9 PREFACE . 11 INTRODUCTION . 13 PART ONE . 14 COMPARATIVE ADVANTAGE: THE THEORY . 14 The Theory of Comparative Advantage . 14 Testing the theory . 15 The Theory and Agriculture . 16 PART TWO . 19 COMPETITIVE ADVANTAGE: THE PRACTICE . 19 Costs and Prices . 19 Land, Labour and Capital . 20 Joint Products . 22 Cost Studies . 22 Engineering Cost Studies . 23 Revealed Comparative Advantage . 25 Trade Liberalisation Simulations . 26 Domestic Resource Cost Analysis . 29 PART THREE . 32 COMPARATIVE ADVANTAGE AND DEVELOPING COUNTRY AGRICULTURE . 32 Comparative Advantage and Economic Growth . 32 Conclusion . 33 NOTES . 35 BIBLIOGRAPHICAL REFERENCES . 36 7 SUMMARY This paper investigates the application of the principle of comparative advantage to policy analysis and policy formulation. It is concerned with both the theory and the measurement of comparative advantage. Despite its central role in economics, the theory is found to be at an impasse, with its usefulness confined mainly to the illustration of economic principles which in practice are not borne out by the evidence. The considerable methodological problems associated with the measurement of comparative advantage are highlighted in the paper. Attempts to derive indicators of comparative advantage, such as those associated with "revealed comparative advantage", "direct resource cost", "production cost" and "trade liberalisation" studies are reviewed. These methods are enlightening, but are unable to provide general perspectives which allow an analysis of dynamic comparative advantage.
    [Show full text]
  • 6. Theories of International Trade and Investment
    BUSA 3000 6. Theories of International Trade and Investment Asst. Prof. Dr. Ilke Kardes Dr. Ilke Kardes BUSA 3000 Spring 20161 Read chapter 6 Dr. Ilke Kardes BUSA 3000 2 Learning Objectives 1. Theories of international trade and investment 2. Why do nations trade? 3. How can nations enhance their competitive advantage? 4. Why and how do firms internationalize? 5. How can internationalizing firms gain and sustain competitive advantage? Dr. Ilke Kardes BUSA 3000 3 Agenda Nation-level Explanations Firm-level Explanations 4 Dr. Ilke Kardes BUSA 3000 4 Comparative Advantage How NATIONS can achieve and sustain economic success? Superior features of a country providing unique benefits in global competition. What are superior features based on? Natural endowments/inherited resources - e.g., labor, climate, arable land, petroleum reserves, etc. Deliberate national policies - create comparative advantages over time - e.g., entrepreneurial orientation, availability of venture capital, innovative capacity, etc. Example: Comparative Comparative advantage Country Product advantage based on Natural endowments / France The climate and soil Wine inherited resources India IT workers Computer software Deliberate national policies Dr. Ilke Kardes BUSA 3000 5 Competitive Advantage How FIRMS gain and maintain distinctive competencies, relative to competitors? Organizational assets and competencies that are difficult for competitors to imitate What are competencies? Specific knowledge Capabilities Innovativeness Superior strategies Close relationships with suppliers Example: Comparative advantage Company Competitive advantage Product based on Dell Global supply chain PC, laptop capabilities Apple Technological leadership Smartphone innovativeness Dr. Ilke Kardes BUSA 3000 6 Theories of International Trade and Investment Dr. Ilke Kardes BUSA 3000 7 Theories of International Trade and Investment Dr.
    [Show full text]
  • Trade and Employment in a Fast- Changing World
    Policy Priorities for International Trade and Jobs A PRODUCT OF THE INTERNATIONAL COLLABORATIVE INITIATIVE ON TRADE AND EMPLOYMENT (ICITE) Chapter 1 Trade and Employment in a Fast- Changing World Read and download the full publication and individual chapters, as well as other material from the ICITE project, at www.oecd.org/trade/icite This document has been developed as a contribution to the International Collaborative Initiative on Trade and Employment (ICITE) coordinated by the OECD. The views expressed are those of the author and do not necessarily reflect those of the OECD, OECD member country governments or partners of the ICITE initiative. CHAPTER 1.TRADE AND EMPLOYMENT IN A FAST-CHANGING WORLD – 7 Chapter 1 Trade and Employment in a Fast-Changing World Richard Newfarmer* and Monika Sztajerowska** Organisation for Economic Co-operation and Development Anchored by a new wave of research under the International Collaborative Initiative on Trade and Employment, this paper reviews the vast literature on ways that trade might affect job creation and wages, including its relation to economic growth, productivity, and income distribution as well as working conditions. The paper also looks at evidence related to oft-voiced concerns about the effects of offshoring and trade in services as well as adjustment costs associated with trade. On balance, the paper concludes that in virtually all of these dimensions trade can play an important role in creating better jobs, increasing wages in both rich and poor countries, and improving working conditions. However, benefits of trade do not accrue automatically, and policies that complement trade opening are needed to have full positive effects on growth and employment.
    [Show full text]
  • The Determinates of International Trade in OECD Countries
    CORE Metadata, citation and similar papers at core.ac.uk Provided by Birkbeck Institutional Research Online Determinants of Recent Trade Flows in OECD Countries: Evidence from Gravity Panel Data Models Chengang Wanga, Yingqi Weib, Xiaming Liuc aSchool of Economic Studies University of Manchester Manchester M13, 9PL bInternational Business Research Group, Department of Economics, Management School, Lancaster University, Lancaster, LA1 4YX cSchool of Management University of Surrey Guildford, Surrey, GU2 7XH ALL CORRESPONDENCE PLEASE TO YINGQI WEI Tel: (+44) 1524 593178; Fax: (+44) 1524 594244; E-mail: [email protected] Around 8700 words including the title page, abstract, references, tables and appendices. Determinants of Recent Trade Flows in OECD Countries: Evidence from Gravity Panel Data Models Abstract This paper aims to identify the main causes of recent trade flows in OECD countries. The specific features of the study include the explicit introduction of R&D and FDI as the two important explanatory variables, unit root tests in the panel data framework and careful treatment of endogeneity. The main findings are that the levels and similarities of market size, domestic R&D stock and inward FDI stock are positively related to the volume of bilateral trade, while the distance between trading countries has a negative impact. These findings lend support to new trade, FDI and economic growth theories. Keywords: Trade, R&D, Foreign Direct Investment, Income Convergence, Gravity Equation. JEL classification: F12 Determinants of Recent Trade Flows in OECD Countries: Evidence from Gravity Panel Data Models I. Introduction International trade plays an important role in economic growth. It promotes competition, specialisation and scale economies, and helps resource allocation based on comparative advantage.
    [Show full text]
  • Trade Theory and Trade Facts∗
    Federal Reserve Bank of Minneapolis Research Department Staff Report 284 March 2001 (First version October 1999) Trade Theory and Trade Facts∗ Raphael Bergoeing ILADES-Georgetown University, Universidad Alberto Hurtado Timothy J. Kehoe University of Minnesota and Federal Reserve Bank of Minneapolis ABSTRACT This paper quantitatively tests the “new trade theory” based on product differentiation, increasing returns, and imperfect competition. We employ a standard model, which allows both changes in the distribution of income among industrialized countries, emphasized by Helpman and Krugman (1985), and nonhomothetic preferences, emphasized by Markusen (1986), to effect trade directions and volumes. In addition, we generalize the model to allow changes in relative prices to have large effects. We test the model by calibrating it to 1990 data and then “backcasting” to 1961 to see what changes in crucial variables between 1961 and 1990 are predicted by the theory. The results show that, although the model is capable of explaining much of the increased concentration of trade among industrialized countries, it is not capable of explaining the enormous increase in the ratio of trade to income. Our analysis suggests that it is policy changes, rather than the elements emphasized in the new trade theory, that have been the most significant determinants of the increase in trade volume. ∗ c 2001, Raphael Bergoeing and Timothy J. Kehoe. This paper grew out of the Bergoeing’s 1996 Ph.D. thesis at° the University of Minnesota. The authors thank the McKnight Foundation and the National Science Foundation for financial support. Useful comments and suggestions have been provided by participants in numerous seminars and conferences, especially Caroline Betts, Harold Cole, Barbara Craig, Patrick Kehoe, David Hummels, Robert Lucas, Moshe Syrquin, Nancy Stokey, and Jaume Ventura.
    [Show full text]
  • New Trade Theories and Developing Countries: Policy and Technological Implications
    New Trade Theories and Developing Countries: Policy and Technological Implications By Samuel Wangwe UNU/INTECH Working Paper No. 7 June 1993 CONTENTS 1. Background 1 2. Trade Theory and Policy Options 3 2.1 Introduction 3 2.2 Conventional Trade Theory: Essence and Relevance 5 2.3 Critics and Extensions within the Conventional Framework 6 2.4 Critics Outside the Neoclassical Framework: Introducing 11 the Dynamics of Firm Capabilities and Technological Change 3. Relevance and Policy Implications for Developing Countries 14 3.1 Narrowing the Technology Gap 14 3.2 North-South Negotiations 17 3.3 Changing Views on the Role of TNCs? 18 3.4 South-South Trade and Investments 19 3.5 Dynamics of Firm Level Capabilities and Implications 20 on Competitiveness 3.6 Role of Government Policy 21 4. Conclusion 25 Endnotes 26 References 27 iii iv 1. BACKGROUND In recent years discussions of development strategy in developing countries have empha- sised the importance of restructuring the supply side of the economy so that it is more competitive internationally. Such discussions usually stress the necessity to change the price structures associated with import substituting strategies by a return to the market. Critics who may well accept the limitations of import substitution strategies, nevertheless often question whether relative price policies are a sufficient basis for export-orientation. One such line of criticism points to the need for supportive policies - often of an interventionist type - to ensure technological dynamism: for without technological change, the maintenance of international competitiveness is, of course put at risk - or will come to depend on holding down real wages or even reducing them in the face of increasingly efficient foreign competitors.
    [Show full text]