Problem Set 4 Outline of Answers

Transcription

1 Advanced Internatonal Trade Prof. A. Waldkrch EC 378 Fall 2006 Problem Set 4 Outlne of Answers 1. a) Dscuss the meanng and mportance of the eontef paradox. eontef found that US mport substtutes were more captal-ntensve than US exports even though the Unted States was the most captal-rch country. Ths, n hs opnon, mpled an emprcal rejecton of the Heckscher-Ohln model. b) How dd Baldwn try to resolve the paradox? Was he successful? Baldwn deleted natural resource sectors and added human captal to the defnton of captal. After these adjustments, US exports were more captal-ntensve than US mport substtutes. Ths confrms a modfed verson of the Heckscher-Ohln model and thus does not represent a complete resoluton of the paradox, though t s not ncorrect to argue that t dd elmnate t. c) eamer s approach to resolvng the paradox was to argue that one should compare the captal-labor rato n producton wth that n consumpton, rather than the ratos emboded n exports and mports. Show that the two approaches are equvalent only f trade s balanced. [Hnt: thnk about how the captal-labor ratos are related.] In thnkng about how to aggregate captal-labor ratos across ndustres n the economy, one needs to thnk about the weghts to be used n that aggregaton. Intutvely, the weghts should reflect the relatve mportance of an ndustry. Thus, ts share of total output would be a natural weght. In the present case, t makes sense to dvde economy-wde output nto producton for domestc consumpton and producton for exports. Domestc consumpton conssts of goods produced domestcally and goods produced abroad (mports).

2 Then, Pr oducton cons. prod. dom. cons. prod. dom. exp orts exp orts. > cons. prod. dom.. exp orts. > Consumpton cons. prod. dom.. > mports. mports ff + + mports exp orts exp orts mports. = mports. mports exp orts. > where s ndcate the value of output and superscrpts ndcate the ndustry consdered, where, e.g., cons.prod.dom. s producton for domestc consumpton. Note that the comparson of - ratos n producton and consumpton s more lkely to gve dfferent answers than the comparson of - ratos n exports and mports, the larger a trade surplus exsts. Ths was certanly true n the data that eontef used. 2. Matthew Slaughter was lookng for convergence n both goods prces and factor prces durng the antebellum transportaton revoluton.. a) Why s ths tme perod a good choce to nvestgate the queston of whether goods and factor prces ndeed do converge, as predcted by the Heckscher-Ohln model? Can you thnk of any other tme perod (and country/countres) that would be a good choce? The tme perod Slaughter consdered s a good choce because the reducton n transportaton costs was extremely large and thus we should be able to ascertan the effects from such a reducton n trade barrers. Other tmes of large reductons n trade barrers would be stuatons where a country was actually lvng n relatve autarky, such as Japan before the 1850s. The dffculty wth such hstorcal studes s n the avalablty and qualty of goods and factor prce data. b) Slaughter estmates the followng equaton for goods prces: PB ln = α + βt + εt PA t

3 ba) What does α stand for and why s t ncluded n the equaton? In the level equaton, ths term ndcates the orgnal prce level. Hence, α s the natural log of the orgnal prce level. It s ncluded n the equaton snce dfferent goods have dfferent levels and thus controllng for t s crucal n estmatng the speed of convergence. If one dd not nclude t, the convergence coeffcent would be ncorrect. bb) What s the expected sgn for β f prces do converge? Is that the sgn he fnds? If there s ndeed convergence, then one would fnd a negatve sgn for β, ndcatng that over tme, the rato of prces n regons A and B s decreasng. Ths s ndeed the sgn Slaughter fnds for all 15 of the ratos he tracks n hs study. bc) What would the magntude of β have to be f there was not just convergence, but prces actually equalzed over the tme perod of hs nvestgaton? Recall that β ndcates the exponental rate of growth of a prce rato. If prces equalze over the 35-year perod of hs nvestgaton, then by 1860, the prce rato would have to be 1. Hence, the necessary growth rate depends on the ntal prce rato, whch s dfferent for each of the ncluded ratos. Slaughter doesn t gve us data for these ntal ratos, except that they could approxmately be read off Fgure 1. Here s a smple example: The NYC/CIN butter rato s about 2 n For t to be 1 by 1860, the rato would have to fall to 50% of ts orgnal level. Hence, the rate of convergence must be ln(0.50)/35 whch s approxmately or close to 2% convergence per year. 3. Draw a fgure showng external economes of scale for a sngle frm. The frm s AC = AF wthout and = BF wth external economes. Thus, at a gven level of output of the frm, the frm s AC are lower,.e. the frm s AC curve shfts down as cumulatve ndustry output expands.

4 4. Consder two economes that are dentcal n all respects. Assume that there exst scale economes n the producton of both goods, rubber duckes and semconductors. a) Explan why each country would specalze n the producton of one good. How s t determned whch good a country specalzes n? An ncrease n producton of one good reduces the opportunty cost of producng t, provdng an ncentve to produce as much as possble of t, whch means puttng all resources nto the producton of one good. Ths s unlke the ncreasng opportunty cost that exst when there are constant returns to scale. It s generally ndetermnate whch good a country specalzes n. In practce, hstory or government polcy wll determne ths. E.g., the U.S. specalzes n arplanes because the sze of the country resulted n great demand for arplane rdes early on. b) Illustrate n a dagram how both countres can beneft from trade. Assume that both countres value the two goods equally. Ths s llustrated n Fgure 6.1 n Salvatore (page 169).

5 c) Now assume that both countres tastes are based towards semconductors. Illustrate n a dagram how both countres can beneft from trade. The bas n tastes towards semconductors mples that the relatve prce of them rses, puttng the country that produces semconductors on a hgher ndfference curve (consumng at pont C) than the country that produces rubber duckes (whch consumes at pont B): Rubber duckes C A B semconductors d) Contnue to assume that both countres tastes are based towards semconductors. Illustrate n a dagram that the country that specalzes n rubber duckes may not beneft from trade. How s that possble? The bas must be so extreme that the relatve prce of semconductors rses so much that the relatve prce of rubber duckes becomes suffcently low that the country that specalzes n that good ends up on an ndfference curve below the one that goes through pont A, the autarky pont.

6 Rubber duckes C B A semconductors 5. a) For the ndustres lsted n Table 4 of Handout 1, compute the degree of ntrandustry trade (IIT). Is there a correlaton between the degree of IIT and how a sector ranks n terms of exports or mports or the trade balance? Item Exports (Rank) Imports (Rank) IIT ADP equpment, offce machnes 29,800 98, Arplane parts 17,538 5, Arplanes 30,291 10, Chemcals - medcnal 25,012 39, Chemcals - n.e.s. 15,846 8, Chemcals - organc 26,765 38, Chemcals - plastcs 28,861 17, Clothng 4,129 76, Corn 5, Cotton, raw and lnters 3, Crude ol , Electrcal machnery 74,286 99,

7 Footwear , Furnture and beddng 4,415 30, General ndustral machnes 38,902 52, Iron and steel mll products 10,430 24, Metal ores and scrap 11,057 5, Natural gas 3,094 34, Petroleum preparatons 14,782 59, Power generatng machnery 41,296 41, Scentfc nstruments 34,544 30, Soybeans 6, Specalzed ndustral machnes 33,144 31, Toys, games, & sportng goods 3,756 25, T's, CR's, etc. 20, , ehcles 71, , Wheat 4, There s no clear correlaton between the rankng n terms of exports or mports and the degree of ntra-ndustry trade. However, there s a correlaton wth the trade balance. A larger absolute balance mples a greater dfference between exports and mports and thus a smaller degree of IIT. b) Pck a sector wth a hgh degree of IIT and explan how your fndng s sensble gven the nature of that ndustry. Electrcal machnery and specalzed ndustral machnes are sectors wth hgh degrees of IIT. Ths fndng makes sense snce such machnes consst of many dfferent parts whch may dffer n ther sophstcaton. Some may be smple enough that they can be produced usng relatvely unsklled labor, others may be so techncally advanced that they requre relatvely sklled labor. The locaton of producton chosen would then be consstent wth skll abundance. Also, these ndustres probably consst of varous fnal products (dfferent types of machnes) that are aggregated nto one ndustry, but smlarly vary n ther degree of sophstcaton. 6. Consder an ntra-ndustry trade model wth monopolstc competton. a) Explan the relatonshp between the number of frms n an ndustry and the prce charged for a varety of a good. There s a negatve relatonshp between prce and the number of frms. Intutvely, more frms mply a greater degree of competton and thus a lower prce.

8 b) Explan the relatonshp between the number of frms n an ndustry and average cost of an ndvdual frm. Average cost of an ndvdual frm wll rse the more frms there are because market share of one frm wll be lower. c) What are the gans from trade lberalzaton n such a model? How are they dfferent from or smlar to the gans n a neoclasscal trade model such as the HO model? There are two sources of gans from trade. One s the famlar one, a decrease n prce. The other s new, an ncrease n the number of varetes a consumer can choose from. Ths mples that consumer utlty depends postvely on the number of varetes,.e. the more choce, the better. d) If there are addtonal gans, how could one go about measurng these n practce? Once could look at mports at a very dsaggregated levels and count the change n the number of mported varetes of a good. Ths was done n a recent paper by Chrstan Broda and Davd Wensten (Federal Reserve Bank of New York Staff Reports, no. 180, March 2004). They estmate that over the last 30 years, the number of mported product varetes has ncreased by a factor of four. They also attempt to gauge the welfare effect of ths ncrease and fnd that the welfare gans from varety growth alone are 2.8 percent of GDP. 7. Usng an nput-output table for the Unted States, calculate the share of ntermedate nputs n gross output for all sectors n the table and for the economy as a whole. Also calculate the share of ntermedate mports n total mports and the measure of vertcal specalzaton from Chen et al. Descrbe n detal how you calculated these numbers. Compare your results to those of Chen et al. (for the approprate year). An Excel fle contanng the nput-output table to be used can be found on the class homepage (problem set secton). Source: U.S. Bureau of Economc Analyss An Excel fle wth the data s avalable along wth these answers on the class homepage problem set secton. Snce ths nput-output table s from 1997, the results for the share of mported ntermedates n total mports and the measure of vertcal specalzaton can drectly be compared to Chen et al. I fnd that the share of mported ntermedates s 51.9 percent, whch s dentcal to what Chen et al. fnd. However, S exports as a share of total manufacturng exports s 9.4 percent, rather than the 12.3 percent that Chen et al. fnd. Ths dfference s a bt puzzlng, although I have calculated S/X only for manufacturng, not merchandse exports as Chen et al.