International Summer School in Economics and Management Universidad de La Habana - Humboldt-Universit

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International Summer School in Economics and
ManagementUniversidad de La Habana -
Humboldt-Universität zu Berlin - DIW
Berlin8.-13. September 2003Havana
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Trade , Development and Distribution A Summary of
Demand and Supply Effects in Trade Theory and
Policy by Jan Hansen Institute of Public
Economics, Humboldt-Universität zu Berlin
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1. Introduction
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• Politicians sometimes propose free trade as a
  possible way for developing countries to reach
  higher growth rates and to catch up with the
  developed world.

• Trade theory seems to support this. Especially in
  developing countries the poor should gain from
  trade. Recent empirical evidence by the World
  Bank also seems to support this.

• However individuals in developing countries and
  across the world do not seem to be convinced.

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• This lecture will give a short introduction to
  the different trade theories
• It will take the approach to devide the effects
  of trade into supply and demand effects
• It will then discuss different effects of trade
  under different distributional assumptions.

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Content

1. Introduction
2. Supply and Demand Effects of Trade
3. Classical Trade Theory
4. New Trade Theory
5. Trade and Protection
6. Summary

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2. Supply and Demand Effects of Trade
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2. Supply and Demand Effects of Trade
Openess
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Production (Costs, Prices, Output)
Consumtion (Wages, Prices, Utility)
Gowth
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Openess
competition
market size
technology
love for variety
specialization
Costs
Utility
Prices
Wages
Production
Consumtion
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3. Classical Trade Theory

• Countries trade because they are different
• Theory developed in 1817 by David Riccardo
• Ohlin, B (1933) Interregional and International
  Trade Cambridge Harvard University Press
• Jones, R.W. (1971) A Three Factor Model in
  Theory Trade and History in Bhagwati, J et al
  eds. Trade, Balance of Payments and Growth pp.
  2-21, Amsderdam North Holland

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Openess
Model Assumtions
No economies of scale
Perfect competition
Both countries produce the same products
Fixed production function
Factor immobility
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Relative price of manufctures to the price of
food
RS Home
RS World
RS Foreign
RD World
Relative quantity of manufactures
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Openess
Riccardian Model
specialization
Distributional Effects
Prices
Heckscher-Ohlin Model Specific Factor Model
Wages
Production
Consumtion
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4. New Trade Theory

• Countries trade because they are similar
• Krugman, Paul (1990) Rethinking International
  Trade
• Massachusetts Institute of Development

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Openess
Model Assumtions
Internal or external economies of scale
Monopolistic competition
Both countries produce different products
Fixed production function
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Openess
market size
Internal
External
Costs
Prices
Wages
Production
Consumtion
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Openess
love for variety
Utility
Prices
Wages
Production
Consumtion
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5. Trade and Technology

• Trade is continuously updating a countries
  production technology
• Krugman, P. (1979) A Model of Innovation,
  Technological Transfer, and the World
  Distribution of Income Journal of Political
  Economy 87, 2
• Helpman, E. (1988) Growth Technological
  Progress and Trade mimeo

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Openess
Model Assumtions
Usually no economies of scale
Monopolistic competition or perfect competition
Both countries produce the same products
Variable production function
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Openess
technology
Costs
Utility
Prices
Wages
Production
Consumtion
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5. Trade and Protection

• Trade opens the internal market to foreign
  competition. This may cause protection as lobbies
  of effected industries whish to preserve monopoly
  rents
• Helpman, Elhanan (1995) Politics and Trade
  Policy CEPR Discussion Paper No. 1269
• Krueger, Anne (1997) Trade Policy and Economic
  Development How did we Learn NBER Working Paper
  5896

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Openess
Model Assumtions
No economies of scale
MonopolyOligopoly rents in Home
Both countries produce the same products
Fixed production function
Pre-specialization
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Openess
competition
Interest groups influence governmental decisions
about free trade.
Side payments
Prices
Wages
Production
Consumtion
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6. Summary
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Openess
competition
market size
technology
love for variety
specialization
Costs
Utility
Prices
Wages
Production
Consumtion
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• Trade influences both production and consumption
  of countries in multiple ways
• The influences change dynamic depending on the
  state of development of a country, and its
  socio-political surrounding.
• Important key variables are
• The distribution of income and rents
• Human and physical capital
• Industrial Organization
• Trickle down speed of technology spillovers
• Vulnerability of the political system against
  interest groups
• The complexity and interaction of different trade
  effects are not yet well understood.
• Simple 3 Minute Trade Models are not able to
  serve as a basis of policy advise