Trade and Technology

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Trade and Technology
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Questions

• How do differences in tech affect trade patterns?
• How does technological change in trading partners
  impact on welfare at home?
• How does trade affect the accumulation of
  technology and future trade patterns?
• How does trade affect the growth rate?

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Ricardian Model

• no natural ranking of countries in terms of
  technology
• yet see industrial countries have absolute tech
  leadership in all products,
• effects of tech change depend on sector, factor
  bias
• too much happening to get a good idea of the
  trade patterns,

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Ricardian Model

• assumes all countries able to produce all goods
• not the case as industrial countries tend to
  produce newly innovated goods and poorer
  countries old technology goods,
• tech is exogenously given
• leaves out questions of how technology is
  accumulated and how trade might impact on the
  accumulation

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Seminar Approach

• Examine some of the issues through a few seminal
  papers of Paul Krugman
• Product cycle model
• how innovation and diffusion of tech impact trade
  patterns and the welfare of each country
• Learning-by-doing model
• dynamic increasing returns and how temporary
  policy may have long run specialisation effects

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Trade and dynamic increasing returns (learning by
doing)

• Krugman (1987)

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Background

• Focus on how trade impacts on technology and
  future trade patterns - endogenous tech!
• Raises issues of how temporary disturbances may
  have permanent effects
• Believe that natural pattern of specialisation
  and temporary disruptions may distort but not
  change this
• nations not driven out of business as resource
  constraints but may be driven out of some business

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Background

• Technological change
• learning-by-doing
• formal RD
• spillovers - from movement of labour, observation
  of product, common inputs, patents
• extent of spillover may be industry-specific,
  regional (clusters), national or international

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Background

• Spillover evidence
• Coe and Helpman - examine TFP growth and estimate
  foreign gains 1/4 of domestic gains from RD in
  intermediates.
• Highly significant for small countries -
  spillovers from large countries are big relative
  to own expenditure

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Assumptions

• Basic assumptions
• Two countries - home and foreign
• one factor of production (labour) can be used to
  produce any of n traded goods and a single
  non-traded good
• Production assumptions
• constant returns to production of each good (1)
• industry learning curve based on accumulated
  experience in production both home and abroad -
  though weaker international spillovers (2)

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Assumptions

• Labour
• assume full employment so wages adjust
• exogenous labour force growing at rate g
• Expenditure
• equal to income, Cobb-Douglas consumption
• (1-s) spent on non-traded goods
• s/n spent on each traded good

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Model Dynamics

• Relative productivities
• function of relative experience which is a
  function of relative labour allocations over time
  (3)
• steady state if labour allocation fixed and can
  then determine upper/lower bounds
• Allocation of labour
• rank products according to relative productivity
• marginal industry has relative wages relative
  productivity (4)

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Model Dynamics Results

• Balance of payments equilibrium
• share of world income devoted to a countrys
  output must match the value of its output
  (equality of supply demand for labour)
• relative wage depends on relative labour demand
  (5)
• Results Dynamics of specialisation
• Initial pattern determined by relative wages and
  relative productivity

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Results

• Initial pattern of specialisation remains
  unchanged and is locked in by further changes in
  relative productivity through learning (6)
• outcomes bounded by relative productivity
  differentials - the larger are international
  spillovers, the narrower the range of outcomes
• relative wages preserved over time
• But
• includes no factor endowment differences which
  might dominate in some cases

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Industrial targeting (infant industry protection)

• Asia used infant industry protection effectively
  to change comparative advantage
• Model dynamics
• initially no labour allocation to product, then
  close off trade and produce for home market (7)
• result is changes relative productivity as
  learning pace now changes in both countries
• if it is sufficient to give the home country a
  cost advantage, then protection no longer required

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Industrial targeting

• Rise in relative wages puts limits on process
• next sector requires higher relative productivity
  and so a longer period of protection
• limit of productivity advantage depends on
  relative home market labour forces
• Lessons
• works best for large lowwage countries (Asia?)
• small countries the domestic market too small,
• high wage countries the extra productivity
  requirement too large

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Dutch Disease

• Natural resource discoveries appreciate the
  exchange rate and crowd out other tradeable
  sectors
• Trade theory may not see this as a problem -
  should specialise based on CA, and when resource
  runs out, lost industry will return
• Yet feeling that sectors that disappear wont
  come back

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Dutch Disease

• Model natural resource discovery as a transfer
  payment from abroad
• raises the relative wage schedule
• Impact
• small transfers may have no impact
• large transfers of short duration may have no
  permanent impact
• large transfers of long duration could
  permanently alter comparative advantage

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Tight Money

• Contractionary monetary policy appreciates the
  exchange rate
• if wages are fixed in local currency, this
  increases the relative wage schedule
• Results the same as Dutch Disease example
• long periods of tight money can permanently alter
  comparative advantage

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Product Life Cycle

• Krugman (1979)

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Background

• Vernon (1966) observed that North specialises in
  new goods and South in goods whose technology is
  older
• Basis for trade is some countries may not be able
  to produce certain goods - unlike other trade
  models
• tech change takes the form of new products, not
  increased efficiency
• tech transfer not efficiency increases in factors
  but ability to produce

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Model - Assumptions

• one factor of production (no factor-endowment
  trade), equal productive efficiency (no Ricardian
  trade)
• two countries - innovating north and
  non-innovating south
• innovation takes the form of generating new
  products only
• there are two types of goods - new goods which
  can be produced by the north only and old goods
  which can be produced by both

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Model - Assumptions

• Production
• one unit of labour to produce one unit of good
• perfect competition so price wage (1)
• North produces old goods only if wages equal
• Demand
• Goods enter the utility function symmetrically
  and variety has utility value (Dixit-Stiglitz)
• relative demand for each good depends on relative
  prices ( relative wages) (2)

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Results

• Demand for Northern labour
• depends on demand for goods produced
• For Wn/Wsgt1, North produces no old goods and so
  labour demand depends on demand for new goods
  (which depends on relative wage)
• a lower relative wage increases demand for new
  goods and also demand for northern labour
• at Wn/Ws1, demand for northern labour is
  perfectly elastic as it is a perfect substitute
  for southern labour

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Results

• Relative wages
• assume full employment so wages adjust
• a function of relative labour forces (supply) and
  ratio of new to old goods (demand)
• assume Ln low enough for WngtWs
• pattern of production
• North produces new goods only
• innovation and technology transfer means this
  group of products changes over time

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Welfare analysis

• Innovation occurs
• increase in product variety increases utility of
  both North and South
• increases the ratio of new to old goods, which
  increases the relative wage with terms of trade
  movements in Norths favour
• North gains from both effects (relative price of
  South goods cheaper plus variety)
• South gains from variety but loses from terms of
  trade movement - could still be better off

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Welfare Analysis

• Technology transfer
• Southern production substitutes Northern
  production for some goods which reduces
  production costs in those goods
• decreases the ratio of new to old goods, which
  decreases the relative wage so terms of trade
  movements in Souths favour
• South better off
• North may be worse off

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Results - Dynamics

• Dynamics
• models innovation rate as dependent on existing
  number of products
• tech transfer rate is a form of natural decay
• system gives a stable dynamic equilibrium of new
  to old good ratio
• Results
• changes in the rates of innovation and technology
  transfer give the same results

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Implications

• Incomes in the north depend on rents from
  monopoly on new products
• monopoly eroded by technological borrowing and
  must be maintained by constant innovation
• innovation required by north not just to grow but
  to maintain real incomes - alternative is to slow
  down transfer!

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Technology Gap

• Krugman (1986)

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Intuition

• there exists a ladder of goods ranked by
  technological intensity and a ladder of countries
  ranked by tech capacity
• tend to see pattern of trade where industrial
  countries produce high tech goods and poorer
  countries low tech goods

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Model

• One factor of production (no H-O trade)
• rank products according to tech intensity and
  countries by tech capacity
• Relative productivity
• unit labour requirement is falling over time, but
  at a more rapid pace for tech-intensive products
• countries have a uniform lag behind world best
  practice for all products - the size of the lag
  depends on the tech capacity of the country

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Model

• Countries closer to frontier have absolute
  productivity advantage in all goods
• relative productivity advantage depends on
  relative tech intensity and country capability
• Pattern of trade
• 2 countries - A more advanced than B
• C-D preferences so each good gets a constant
  share of expenditure
• country A must have higher wage so B produces
  something

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Model

• BoP equilirium, more B produces, lower the
  relative wage as less demand for A labour
• marginal good determines pattern of
  specialisation

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Results - widening the gap

• leaders productivity advantage improved in all
  sectors - greatest in tech intensive products
• Result
• relative wage of leading country increases
• range of products produced by leading country
  increases
• productivity increase is greater then wage
  increase

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Results - widening the gap

• Welfare
• Leading country is better off as real wage
  increases on all goods
• Lagging country also better off as productivity
  increase gt wage increase

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Results - narrowing the gap

• reduction in productivity advantage in all
  sectors - greatest in tech intensive products
• Result
• relative wage declines
• range of products produced by lagging country
  increases
• Welfare
• lagging country better off as real wage increases
  for all goods

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Results - narrowing the gap

• leading country sees no real wage change for own
  products and gain on products that shift
  production base. Of products already produced by
  developing country, likely to lose on least tech
  intensive