Week 5 Flashcards
Which are the 2 theories explaining who benefits from trade ?
- factor model
2. sector model
Explain the factor model
Context: 2 countries, 2 goods and 2 factors (=labor and capital)
Given informations:
- Good A production is labor-intensive
- Good B production is capital-intensive
- US is capital abundant and labor scarce
- China is labor abundant and capital scarce
Thanks to the comparative advantage we know that the abundant factor is cheap whereas the scarce factor is expensive.
Consequently we understand that China will specialized in Good A production and US in good B production.
What are the distributional effects, when protection is decreasing in the capital-intensive state ? Good A = capital intensive Good B = labor intensive - relative price of the 2 goods - imports-exports - production of the 2 goods - demand of the 2 factors (labor + capital) - effects on the capital // labor - wages
- relative price of good A increases
- relative price of good B decreases
- imports of the good B increase
- exports of the good A increase
- production of the good B decreases
- production of the good A increases
- demand for capital increases
- demand for labor decreases
- shortage of capital increases
- excess labor increases
- return on capital increases
- wages decreases
What are the distributional effects, when protection is decreasing in the labor-intensive state ? Good A = capital intensive Good B = labor intensive - relative price of the 2 goods - imports-exports - production of the 2 goods - demand of the 2 goods - effects on the capital // labor - wages
- relative price of good B increases
- relative price of good A decreases
- imports of the good A increase
- exports of the good B increase
- production of the good A decreases
- production of the good B increases
- demand for capital decreases
- demand for labor increases
- shortage of labor increases
- excess capital increases
- return on capital decreases
- wages increases
What are the political implications of the factor model ?
Class Conflict: political battle over trade form along factor lines (capital / labor / land); relatively abundant factors want free trade; relatively scarce factors want protection.
Political Parties: strong party cleavages over trade; parties representing abundant factor support free trade; parties representing scarce factor oppose trade
Interest Groups: weak interest group activity; controversial views over trade within sectors, depending on importance of factors for production
Explain a counterexample to the factor model
Smoot-Hawley
Background: U.S. tariffs in 1932; RTAA in 1934; gradual dismantling of tariffs
Cleavages: sectoral conflict; log-rolling and voting along narrow industry lines (Congressional districts)
Political Struggle: Democratic (Republican) tendency towards (against) free trade; parties split over trade; active industry lobbying
Explain the sector model
The sector model has different cleavages from the factor model : sectoral conflict; log-rolling and voting along narrow industry lines (Congressional districts). The main assumption is that the factors are tied to industry-specific production (Ricardo-Viner).
What are the distributional effects of the winners and the loosers ?
Winners: capital and labor in industry using the abundant factor intensely (export-oriented)
Losers: capital and labor in industry using the scarce factor intensively (import-competing)
What are the political implications of the sector model ‘
Sectoral Conflict: political battle over trade form along industry lines; industries using abundant factors intensively want free trade; industries using scarce factors intensively want protection
Political Parties: intra-party cleavage over trade policy; parties represent voters in export-oriented and import-competing industries; no clear partisan strategy over trade
Interest Groups: highly active industry-specific interest groups; strong lobbying and campaigning
Which between the 2 models (factor // sector) are more accurate right now ?
The sector model. We see in CH that some political parties do not represent the class of the societies however the sectors.
Which theory can reconcile the 2 different models (sector // factor)?
The theory developped by Hiscox: the factor mobility.
There are 2 different assumptions:
1. full mobility across industries (factor model)
2. full specificity to industry (sector model)
If the full mobility is low then we live in a sector world where as the full mobility is high then we live in a factor world.
The world we live in (either sector or factor) varies through: regulations; transportation; physical relocation; industry-specific machinery and skills.
To measure whether we are in a sector or a factor world the author look at the variation in rate of returns for factors (wages, profits) across sectors.
Consequently if there is a high variation of wages across sectors -> there is low mobility ! We are then in a sector model.
If the variation decreases, the profits and wagues are almost equal, there is a high mobility. We are then in a factor model.
Where does the factor mobility theory differs ?
It differs over time and from country.
Which theory explains the voter’s attitude, who is the author ?
Scheve and Slaughter developped the theory of the individual’s attitude in order to explain the preference for protectionism or free trade.
Explain the theory of the individual’s attitude by Scheve and Slaughter
The authors stated the hypotheses that in favor of free trade
a) if highly skilled (factor model);
b) if employed in exports (sector model)
IV: Wage, Education (factor model), sector tariffs, sector exports (sector model) -> DV: Preference of Free Trade or Not
This theory tested whether sector or factor model and found out that just factor model is significant!
Their main observations:
if your wage increase you are less likely to favor protectionist measures
if your education increase you are more likely in favor of free trade
if the sector tariff increase you are more likely to favor protectionnist measures
Which study critics the theory of Scheve and Slaughter ?
Rho and Tomz’s study critics the individual’s attitude theory by Scheve and Slaughter:
Scheve and Slaughter = people know what their interests are and vote accordingly
Rho and Tomz = you can manipule people’s decision easily if you give them the whole pictures (who are the winner and who are the loosers) ==> trade preferences more in line with self-interest if knowledge increases
During the experiment, the survey respondents receive random cues about effect of trade. We observe that they care about their population.
