Trade Flashcards
(12 cards)
Heckscher-Ohlin Model
2 countries, 2 goods, 2 factors of production (K & L)
→ a country exports those goods who use the more abundant factor more intensively and import those goods who use the more scarce factor more intensively
Krugman Model
- Focus: Trade with increasing returns to scale and product differentiation
- Key Assumptions:
1. Monopolistic competition
2. Identical countries (same resources & tech)
3. Consumers love variety
4. Firms face fixed costs → average costs fall with scale - Explains:
1. Intra-industry trade between similar countries
2. Gains from trade via lower prices and more variety
3. Trade without comparative advantage - Main Insight:
→ Trade enlarges markets → firms scale up → lower costs → more consumer choices
Stolper Samuelson Theorem
An increase in the relative price of a good will will benefit the factor of production used more intensively while producing that good
Rybcinski Theorem
Profit maximization problem
max L (P x MPL - w x L)
Profit maximization FOC
P x MPL = w
How does assumption of free movement of labour across sectors impact the derivation of relative prices
- workers work in whichever sector pays best
- sectors hire workers until profit maximization FOC is met
-> wages across each sector in each country are equal
Tariffs
tax on foreign goods (imports)
-> increases the world price
Quotas
Limit on import quantity
Distribution of quota rents
- licenses go to home firms
- licenses go to home firms and they do rent seeking
- quota auction
- voluntary export restraint
Welfare implications of quota rents
- loss of CS, producers benefit
- loss of CS, rent seeking is costly
- government benefits
- foreign country benefits (van raise price per unit)
Total welfare
CS + PS + GR
