Chapter 5 Who Gains and Who Loses from

Chapter 5: Who Gains and Who Loses from Trade? Mc. Graw-Hill/Irwin Copyright 2009 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Within a country n SR effects of opening trade n The US - exports wheat (price of wheat increases compared to pre-trade levels) n US winners: landlords in wheat production, wheat farm workers n US losers: cloth workers, n landlords in cotton n ROW – exports cloth (price increases) n ROW winners: cloth workers, landlords in cotton and wool production n ROW losers: landlords in wheat production, wheat farm workers 5 -2

n LR factor-price response – factors move between sectors in search of higher returns (income gaps in SR) In the US… n Some US cloth workers will find jobs in wheat production n Wages in wheat production will decline after the SR increase (how much? ) n Wages in cloth production will increase after the initial decrease n Some land will be used for wheat instead of cotton and wool n Rents on land used for wheat will decline after the initial increase 5 -3 n

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Will wages and rents go back to their pretrade levels after the LR adjustment? n No! n n LR winners: US landowners and foreign workers n The price of land stays above pre-trade levels in US n The price of labour remains above pre-trade levels in ROW n n LR losers: US workers and foreign landowners Reason: wheat is more land intensive and cloth is more labour intensive 5 -5

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Implications of the H-O theory n The Stolper-Samuelson Theorem Trade changes product prices – wheat has a higher relative price than pre-trade in US n Real return to the factor used intensively in the rising-price industry rises (land in wheat production in the US) n The real return to the factor used intensely in the falling-price industry falls (labour in cloth production in the US) n This does not depend on how much of each product n 5 -7

n The specialized-factor pattern The more a factor is specialized, or concentrated, in the production of a product whose relative price is rising, the more this factor stands to gain from a change in the product price n The more a factor is concentrated into the production of a product whose relative price is falling, the more it stands to lose from the change in the product price n 5 -8

n The factor price equalization theorem With time not only product prices equalize, but also factor prices (even if factors don’t move across countries) n Workers earn the same wage rate in both countries n n Pre-trade wages in US are higher due to scarcity n After trade wages decline n Pre-trade wages are lower in ROW (abundant) n After-trade wages are higher (cloth-export) n Land earns the same return in both countries 5 -9

International Factor Price Equalization n n With the shift to free trade: For each factor, its rate of return becomes more similar between countries. Under ideal conditions, its real rate of return is the same in different countries. Example: Labor. With no trade, the wage rate is high in the labor-scarce country. The wage rate is low in the labor-abundant country. With free trade, the import of labor-intensive products pushes the wage-rate down in the labor-scarce country. The export of labor-intensive products pulls the wage rate up in the laborabundant country. 5 -10

H-O and actual trade patterns Factor endowments see table n International trade – see table n 5 -11

Figure 5. 3 - Shares of the World’s Factor Endowments, Early 2000 s 5 -12

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Export-oriented and importcompeting factors The US pattern – see table n The Canadian pattern –see table n 5 -14

Factor Content of U. S. Exports and Competing Imports 5 -15

Canada’s Exports and Competing Imports 5 -16

Do factor prices equalize internationally? ? The strong form of theorem is subject to many assumptions and conditions n A weak form of theorem – tendency of factor prices towards equalization n 5 -17

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International Factor Price Equalization n n With the shift to free trade: For each factor, its rate of return becomes more similar between countries. Under ideal conditions, its real rate of return is the same in different countries. Example: Labor. Ø With no trade, the wage rate is high in the laborscarce country. The wage rate is low in the laborabundant country. Ø With free trade, the import of labor-intensive products pushes the wage rate down in the laborscarce country. The export of labor-intensive products pulls the wage rate up in the laborabundant country. 5 -21

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