ECO 745: Theory of International Economics. Jack Rossbach August 26, Week 1

Transcription

1 ECO 745: Theory of International Economics Jack Rossbach August 26, Week 1

2 Course Details Time & Location: 1:15-2:35 PM Wed & Fri in BA 214 Office Hours: 3:00-4:00 PM Wed in BA 109B (or by appointment) Contact: Course Website:

3 Material Covered: Review Preliminaries: Ricardian, H-O, dynamic extensions New Trade Theory: Monopolistic competition, increasing returns to scale Computational GE: Armington models, applied static general equilibrium

4 Material Covered: Recent Gravity: Gravity regressions, gravity in GE models ***Heterogeneity: Melitz, Eaton-Kortum, the extensive margins Welfare Gains: Trade elasticities, ACR, non-parametric methods

5 Material Covered: Recent Gravity: Gravity regressions, gravity in GE models ***Heterogeneity: Melitz, Eaton-Kortum, the extensive margins Welfare Gains: Trade elasticities, ACR, non-parametric methods If Have Time/Interest: Trade agreements, regional economics, spillovers

6 Course Goals Gain tools necessary for conducting research in international trade Solve and understand models common in international trade research Learn to combine models with data to provide insight on real world issues (and to allow us to evaluate the accuracy/applicability of various models) Gain familiarity with what makes an interesting and well-executed paper

7 To Achieve These Goals We have lectures, problem sets, a final exam, and an in class presentation.

8 To Achieve These Goals We have lectures, problem sets, a final exam, and an in class presentation. Lecture slides and problem sets will be posted on the course website Problem sets should be typed: Latex, Lyx, Office, Mathtype, Scientific Workplace anything that can produce formatted equations is acceptable. No scans of handwritten equations. Final exam will be on last day of class. Details forthcoming.

9 In Class Presentations Meant to help us gain familiarity with recent research in international trade. Two options: 1. Find a recent paper related to international trade that you are interested in. Read it and construct slides to give a minute presentation discussing the paper. 2. Write up a short research proposal for a topic you are interested in working on and near the end of the semester deliver a minute presentation on your idea to the class. You will be expected to have at a minimum some original data work and a working toy model.

10 Pause for Introductions -Name, background, research interests, anything specific you want out of the class or want to cover

11 Very Basics: Why do Countries Trade? Ricardian: Countries have different technologies for producing goods. Comparative advantage. Heckscher-Ohlin: Countries have same technology for producing goods, but different factor endowments which are used in the production of the goods. Armington: Countries have different goods, and consumers like to consume foreign goods. Monopolistic Competition: Countries have firms which produce differentiated varieties of a good. Consumers like to consumer different varieties. Increasing Returns: Cheaper to produce a good all in a single place, so countries should specialize and trade.

12 Preliminaries: Ricardian Model of Trade Comparative advantage: countries differ in technology, relatively good at producing certain goods. Dornbusch, Fischer and Samuelson (1979) Ricardian model with 2 countries and a continuum of goods

13 Model Setup Two countries, ii, jj = 1,2 Continuum of goods indexed by zz 0,1 Labor LL ii is only factor of production, supplied inelastically Countries differ in labor productivities for each good aa ii zz : yy ii = ll ii zz /aa ii zz Order the goods by relative comparative advantage aa 2 zz aa 1 zz (highest at 0, lowest at 1) Country 1 can make goods relatively cheaper near zero, and country 2 can make goods relatively cheaper near one.

14 Equilibrium Definition Equilibrium elements Prices for each good: pp zz Wages: ww 1, ww 2 Consumption, labor input, and production for each good: cc ii zz, yy ii zz, ll ii zz Such that 1) Given prices and wages, consumers maximize utility subject to budget constraint 2) Firms maximize profit for each good produced in a country 3) Markets clear (consumption = output, labor used in production sums to labor endowment)

15 1. Consumers problem Given pp zz, ww ii consumer in country ii to solve 1 max UU cc ii zz 0 dddd subject to budget constraint 1 0 pp zz cc ii zz = ww ii LL ii cc ii zz 0, zz

16 2. Firms Problem Given pp zz, ww ii firms in country ii maximize profits for each good zz max pp zz yy ii zz wwll ii zz subject to production technology: yy ii zz = ll ii zz /aa ii zz

17 2. Firms Problem Given pp zz, ww ii firms in country ii maximize profits for each good zz max pp zz yy ii zz wwll ii zz subject to production technology: yy ii zz = ll ii zz /aa ii zz Yields: pp zz = ww ii aa ii zz if yy ii zz > 0

18 3. Market Clearing Goods market clears for each good (if autarky instead of trade would have cc ii zz = yy ii zz ) Labor market clears for each country cc 1 zz + cc 2 zz = yy 1 zz + yy 2 zz, zz 0,1 1 ll ii zz dddd = LL ii, ii = 1,2 0

19 Equilibrium Solution: Cutoff Cutoff zz such that country 1 produces and exports goods in 0, zz Country 2 produces and exports goods in zz, 1

20 Equilibrium Solution: Relative Wages Country 1 s fraction of income spent on domestically produced goods: θθ 1 zz = zz 0 pp zz cc1 zz dddd ww 1 LL 1 On foreign produced goods: 1 θθ 1 zz = 1 zz pp zz cc1 zz dddd ww 1 LL 1 Balanced trade condition: 1 θθ 1 zz ww 1 LL 1 = θθ 1 zz ww 2 LL 2 Relative wages given by: ww 1 = θθ 1 zz ww 2 1 θθ 1 zz LL 2 LL 1 Produce more goods/smaller country higher relative wage.

21 Analytic Simplifications Cobb Douglas Preferences: UU cc ii zz = log c i z Symmetry: LL 1 = LL 2 = LL Production technologies: aa 1 zz = ee aaaa aa 1 zz aa 2 zz = ee

22 Production Technologies aa 1 zz ee ee aaaa Inverse Labor Productivity zz

23 Symmetry Will have equilibrium with ww 1 = ww 2 (relative wages w 1 w 2 = 1) Will have cutoff zz = 1/2 Country 1 produces and exports goods in Z 1 = 0, 1 2 Country 2 produces and exports goods in Z 2 = 1 2, 1

24 Symmetric Equilibrium aa 1 zz ee ee aaaa Inverse Labor Productivity zz

25 Symmetric Equilibrium Prices pp zz = eeaaaa,,,,,, zz 0, zz ee aa 1 zz, zz zz, 1 Wages: ww 1, ww 2 = 1 (normalize wages to 1) Consumption, labor input, and production: cc ii zz = LL pp zz zz 0,1 yy ii zz = 2LL pp zz iiii zz ZZ ii, yy ii zz = 0 iiii zz ZZ ii ll ii zz = 2LL iiii zz ZZ ii, ll ii zz = 0 iiii zz ZZ ii

26 Trade Costs and Trade Policy Have a working model, can use it to think about the effects of trade costs and trade policy

27 Iceberg Trade Costs: Suppose each country faces an iceberg transportation cost of ττ > 1 when exporting: yy ii jj zz = ll ii zz ττaa ii zz, iiii ii jj Still costless to produce for domestic market: yy ii ii zz = ll ii zz /aa ii zz

28 Iceberg Trade Costs: Cutoffs Will no longer have single cutoff If ττ > max aa 1 zz aa 2 zz, aa 2 zz aa 1 zz then good will not be exported by either country Two cutoffs zz 1 and zz 2 ( zz 2 > zz 1 ): Country 1 produces goods zz 0, zz 2, exports goods zz 0, zz 1 Country 2 produces goods zz zz 1, 1, exports goods zz zz 2, 1 Keep the same symmetric setup, so still have an equilibrium with ww 1 = ww 2 = 1.

29 Symmetric Equilibrium: Iceberg Trade Costs aa 1 zz ττee ττee aaaa 1 Inverse Labor Productivity aa 1 zz ee ee aaaa zz

30 Tariff Trade Costs Now suppose ττ is an ad valorem tariff instead of an iceberg trade cost. Still have yy ii jj zz = ll ii zz ττaa ii zz, ll ii zz aa ii zz, iiii ii jj iiii ii = jj Difference is that tariffs are rebated back to consumers. Consumer budget constraint: 1 0 pp ii zz cc ii zz dddd = ww ii LL ii + TT ii TT ii = zz ττ 1 pp jj yy ii jj dddd

31 Cutoffs and Symmetric Equilibrium: Tariff Trade Costs Same as with iceberg trade costs. Two cutoffs zz 1 and zz 2 ( zz 2 > zz 1 ): Country 1 produces goods zz 0, zz 2, exports goods zz 0, zz 1 Country 2 produces goods zz zz 1, 1, exports goods zz zz 2, 1

32 Consumption Differences: Iceberg Costs vs Tariffs Under iceberg transportation costs: cc 1 zz = LL, zz 0, eeaaaa zz 2 LL, zz ττeeaa 1 zz zz 2, 1 ; cc 2 zz = LL, zz 0, ττeeaaaa zz 1 LL, zz eeaa 1 zz zz 1, 0 Under tariffs cc 1 zz = LL + TT 1 ee aaaa, zz 0, zz 2 LL + TT 1, zz ττeeaa 1 zz zz 2, 1 ; cc 2 zz = LL + TT 2 ττee aaaa LL + TT 2, zz eeaa 1 zz, zz 0, zz 1 zz 1, 1 Where TT ii = ττ 1 LL ττ 1 ττ 1 ττ zz 1 zz 1

33 Increased Consumption from Tariff Revenue (vs iceberg costs) aa = 1.5 % Change in Consumption aa = 0.5 aa = 1 ττ

34 GDP and Tariffs Can see how GDP and real GDP change as tariffs change Country 1 s Gross Domestic Product zz 2pp1 zz 1pp1 GGGGPP 1 = zz cc 1 zz dddd + 2 zz cc 2 zz dddd = 0 0 LL 1 ττ 1 ττ zz 1 Increasing in productivity level aa and country size LL, decreasing in tariffs ττ

35 Real GDP and Tariffs: Base Prices Real GDP is value of production evaluated at base period prices Let the base period be at ττ = 0, then base prices are pp zz = ee aaaa, zz 0, 1 2 ee aa 1 zz, zz 1 2, 1

36 Real GDP and Tariffs Country 1 s Real Gross Domestic Product (constant price GDP) zz 2 zz 1 RRRRRRPP 1 = pp zz cc1 zz dddd + pp zz cc2 zz dddd 0 0 = GGGGPP 1 aa + ττ 1 + aaaa log ττ 2aaaa Note that RRRRRRPP 1 = GGGGPP 1 if ττ = 1, otherwise RRRRRRPP 1 GGGGPP 1

37 Tariffs: Current vs Constant Price GDP aa = 0.5 RGDP/GDP aa = 1 aa = 1.5 ττ