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Commerce and Coalitions

Learn about comparative advantage in trade, effects of tariffs, and gains from trade in various industries. Explore how trade impacts welfare, winners and losers, and the effects of tariffs on producers, consumers, and governments. Discover why compensating losers can be challenging and how trade influences domestic coalitions based on factor endowments.

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Commerce and Coalitions

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  1. Commerce and Coalitions Review of International Trade Theory

  2. Comparative Advantage 1. Comparative advantage –› trade 2. Gains from trade in an industry 3. Effects of a tariff

  3. 1. Comparative Advantage →→ Trade Definition: Lower relative price (not necessarily absolute) • Different productivity • Different technology • Different factor endowments

  4. Comparative Advantage Example: Common technology, different factor endowments: • Technology: 1 K + 2 L = 1 Textile 2 K + 1 L = 1 Iron • Factor endowments: • Australia has 4 K and 2 L (2 iron or 1 tex) • Bulgaria has 2 K and 4 L (2 tex or 1 iron)

  5. Comparative advantage Iron PA: Iron = 1/2 Textile 2 PB: Iron = 2 Textile W A PWorld: 1 Iron = 1 Textile 1 B Textiles 1 2

  6. Conclusions: • Trade improves welfare because higher indifference curves become reachable • Trade lowers price of Textiles in capital-rich country A, hurting laborers • Trade lowers price of Iron in labor-rich country B, hurting capital owners Intuition: Scarcity → High price. Trade reduces scarcity

  7. 2. Gains from trade in an industryImporting country (PD > PW) P D S PD: Domestic price PD PW: World price PW QPW QD QCW Q

  8. 2. Gains from trade in an industryImporting country (PD > PW) P D S PD PW Value of imports QPW QD QCW Q

  9. 2. Gains from trade in an industryImporting country (PD > PW) P D S PD Consumer gain PW QPW QD QCW Q Consumer gains: QD (PD - PW) + 1/2(QCW - QD)(PD - PW)

  10. 2. Gains from trade in an industryImporting country (PD > PW) P D S Welfare Gains > Losses PD Producer loss PW QPW QD QCW Q Producer loss: QPW (PD - PW) + 1/2(QD - QPW)(PD - PW)

  11. 2. Gains from trade in an industryExporting country (PD < PW) P D S PW PD: Domestic price PD PW: World price Value of exports QCW QD QPW Q

  12. 2. Gains from trade in an industryExporting country (PD < PW) P D S PW Producer gains PD QCW QD QPW Q Producer gain: QD (PW - PD) + 1/2(QPW - QD)(PW - PD)

  13. 2. Gains from trade in an industryExporting country (PD < PW) P D S PW Welfare Gains > Losses Consumer loss PD QCW QD QPW Q Consumer loss: QCW (PW - PD) + 1/2(QD - QCW)(PW - PD)

  14. 2. Gains from trade in an industry Importing country Exporting country P D S P D S Pl Cg Cg Pg Cl Pg Q Q Conclusions: - Trade increases welfare - Winners and losers - Compensation?

  15. 3. Effects of a tariff D S P PD PD: Domestic price PT PW: World price PW PT: Price with tariff QPW QCW Q QPT QCT Imports with tariff Imports with no tariff

  16. 3. Effects of a tariff D S P PD Consumer loss: PT A + B + C + D A B C D PW QPW QCW Q QPT QCT Imports with tariff Imports with no tariff

  17. 3. Effects of a tariff D S P Gains: Producer gains: A PD Government gains: C PT A B C D PW Welfare loss: B + D QPW QCW Q QPT QCT Imports with tariff Imports with no tariff

  18. Why not compensate the losers? • Concentrated costs, diffuse benefits • Incentives to defect • Economic change shifts political power • Bargaining • Why bother?

  19. Stolper-Samuelson • Intuition: scarcity -> high price • Factors of production that are more scarce domestically than globally have a higher price in the absence of trade • Domestically abundant factors are more valuable if there is trade • Domestic coalitions should depend on which factors are abundant

  20. Trade and Cleavages Land-Labor ratio High (land) Low (land) (urban- rural) (class conflict) High K (urban- rural) (class conflict) Low K Change occurs when: • Trade increases (transport costs decrease) • Relative factor endowments change (development: K increases)

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