Econ 260W Seminar on Globalization with Prof Ben Zissimos

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Econ 260WSeminar on GlobalizationwithProf Ben
Zissimos

• Who gets hurt by
• Globalization?

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Introduction

• Last time we saw that international trade makes
  both countries better off as a whole.
• But trade has substantial effects on the income
  distribution within each trading nation.
• There are two main reasons
• Resources cannot move immediately or costlessly
  from one industry to another.
• Industries differ in the factors of production
  they demand.
• The specific factors model allows trade to affect
  income distribution.

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The Specific Factors Model

• Assumptions of the model
• Assume that each country can produce two goods,
  manufactures and food.
• There are three factors of production labor (L),
  capital (K) and land (T for terrain).
• Manufactures are produced using capital and labor
  (but not land).
• Food is produced using land and labor (but not
  capital).
• Labor is therefore a mobile factor that can be
  used in either sector.
• Land and capital are both specific factors that
  can be used only in the production of one good.

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The Specific Factors Model
The PPF in the Specific Factors Model
Economys production possibility frontier (PP)
Production function for food
Production function for manufactures
Economys allocation of labor (AA)
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The Specific Factors Model

• Prices, Wages, and Labor Allocation
• The demand curve for labor in manufacturing
• MPLM x PM w
• The wage equals the value of the marginal product
  of labor in manufacturing.
• The demand curve for labor in food MPLF x
  PF w
• The wage rate must be equalized across sectors,
  because labor is freely mobile between sectors.
  The wage w is determined by
• LM LF L

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The Specific Factors Model
The Allocation of Labor
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Opening up to Trade

• Assume that this country has a comparative
  advantage in the production of manufactures.
• Last time we saw that if a country has a
  comparative advantage in a good that means it is
  relatively cheap in autarky compared to other
  countries.
• When we open up to trade, we should expect PM to
  rise. So what will be the effect of an increase
  in PM on the incomes of capital, land and labor?

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Opening up to Trade
A Rise in the Price of Manufactures
10 upward shift in labor demand
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Income Effects of Trade

• Relative Prices and the Distribution of Income
• Suppose that PM increases by 10. Then, we would
  expect the wage to rise by less than 10, say by
  5. Here are the income effects
• Owners of capital
• They are definitely better off.
• Landowners
• They are definitely worse off.
• Workers
• We cannot say whether workers are better or worse
  off depends on the relative importance of
  manufactures and food in workers consumption.