5. The distribution of gains between individuals within countries. The ability to trade (voluntarily, non-coerced) leads to mutual gains from trade.

Transcription

1 Gins from Trde: unotes Mutul gins from exchnge 2. Gins from speciliztion 3. The gins-from-trde theorem 4. The distribution of gins between countries 5. The distribution of gins between individuls within countries The bility to trde (voluntrily, non-coerced) leds to mutul gins from trde. Suggestions tht one country cn only benefit t the expense of the other re flse.

2 (1) Point of deprture: the bility to trde t ny prices other thn the 2 country s utrky prices must mke the country better off. (2) The optiml direction of trde depends only on the difference between the country s utrky prices nd world prices: Sell high, buy low: sell to the world wht is more vluble to them thn t home; buy from the world wht is more costly nd difficult to produce t home. (3) Gins from trde re mutul for two countries: it is not the cse tht one gins t the expense of the other.

3 Figure 5.1 Figure 5.2 X 2 p *1 U * X 2 U X f2 U U * ppf A p *2 X h2 A f D e D A h X 1 X f1 X h1 X 1

4 3 (4) Totl gins cn be decomposed into gins from exchnge nd gins from speciliztion. (Figure 5.2) Gins from exchnge When two trders hve similr preferences but different endowments, trde llows them to hve more diverse consumption bsket or more blnced consumption bsket. Gins from speciliztion However, typiclly countries hve the bility to produce different bundles of goods (the production possibility curve). Figure 5.2 shows tht there re further gins to be cptured by specilizing in wht country is good t.

5 The gins-from-trde theorem - Free Trde versus Autrky 4 An undistorted, competitive economy must be better off in free trde thn in utrky. p * - vector of free trde prices, X * - vector of free trde outputs, C * - vector of free trde consumption, X - vector of utrky outputs, C - vector of utrky consumption,

6 (1) Production efficiency in competitive, undistorted economy 5 The free-trde production bundle yields higher income t free-trde prices thn the utrky bundle. We estblished this in erlier notes (2) Autrky mrket clering, trde blnce (3) Substitute (2) into (1)

7 6 Free trde is "Reveled Preferred" utrky In free trde (t free-trde prices), the economy could hve purchsed the utrky consumption bundle but chose not to (the utrky bundle is cheper tht the free-trde bundle ctully purchsed). This mens tht the economy prefers the free-trde bundle to the utrky bundle. Figure 5.1 dds in indifference curves for illustrtion, but we stress tht the vlidity of the rgument is independent of the position of the indifference curves.

8 Distribution of totl gins between countries 7 The gins from trde theorem is very powerful, but limited. It sys tht free trde is better thn utrky, but it doesn t sy nything bout the size of the gins, nd which country gets more of the totl gins. Figure 5.3: E is the endowment point: h hs ll the X 1 nd f hs ll of the X 2. There re whole set of trdes tht mke both better off (or no worse off): ll points in the lens formed by the indifference curves through the endowment point E. The set of Preto efficient trde re the tngency points (contrct curve) between A nd B in Figure 5.3. At A Ole gets ll of the gins, t B Len gets ll of the gins.

9 Figure 5.3 Figure 5.4 O f X 2 X 2 U h U f A C p f T A * U 1 U1 T 1 A 1 * U 2 p *1 U 2 B p T 2 A 2 O h p h X 1 E T' A' X 1

10 8 In sitution with only two trders, we usully think of this s brgining sitution, where better or more ptient brginers get more of the gins. In mrket situtions where there re lrge numbers of trders in the two economies, the outcome is determined through supply nd demnds tht determine equilibrium prices, nd equilibrium prices determine the distribution of the totl gins. Lter, in chpter 7, we will show tht country size hs n importnt role to ply in the distribution of gins from trde.

11 Distribution of gins between consumers within country. 9 The sitution gets more complicted when there re mny consumers within country who hve difference endowments, bilities, or preferences. Key point: the opening of trde inevitbly involves chnges in the prices of goods nd fctors of production. Chnges in the prices of fctors redistribute income mong households. Chnge in the prices of goods chnge utility differently for households with different preferences. Figure 5.4. Two households with different preferences. The chnge in reltive prices from p to p* mkes type-1 better off, type-2 worse off.

12 Secondly, households cn derive their income in different wys, so price chnge mke some better off nd my mke some worse off. 10 Suppose country h hs lots of X 1 producers but few X 2 producers. Ech producer is useless t the other tsk. Equilibrium for country h with lots of X 1 nd little X 2 is t point X h, nd the tngent to the indifference curve is the equilibrium reltive price rtio. (Figure 5.5) Equilibrium for country f is t point X f in Figure 5.5, where lots of X 2 nd little X 1 men high high price for X 1 reltive to X 2. => in ech country, producers of the scrce good enjoy price dvntge.

13 Figure 5.5 Figure 5.6 X 2 U X 2 p * A X f p h D p h p f X h U * U p * X 1 X 1

14 Now let the countries trde. Perhps they will trde to the mid-point between f nd h, denoted point D in Figure Note especilly tht the reltive price rtio is now between the two utrky price rtios. Who don t you wnt to be in this exmple: nswer, A producer of the scrce good: X 2 producer in country h or X 1 producer in country f.

15 The income of the X 2 producers in country h is fixed t A in Figure But fter trde, the producer gets lower price reltive to the cost of buying X 1, nd so this individul is worse off with trde. Similrly, the minority X 1 producer in country f re worse off with trde becuse the price tht he/she cn sell X 1 for is now lower fter trde (Figure 5.7). Figures revel the fundmentl tension over trde policy nd give the key intuition s to why groups within country fight so ferociously over free trde versus protection: While free trde increses ggregte income for country, nothing gurntees tht ll individuls within the country benefit much less benefit eqully.

16 Figure 5.7 X 2 p f p * A X 1

17 Trde nd distortions 13 We wnt to close with one cvet. We will return to this point mny times but wnt to give quick introduction here. Proofs of gins from trde relies on number of ssumptions such s perfect competition nd the bsence of other distortions such s txes nd subsidies. Gins from trde do not lwys occur in the presence of distortions. Intuition: in undistorted economies, producers nd consumers re mking decisions on the bsis of true underlying vlues nd correctly evlute the opportunity costs of lterntives.