Distortions in Two Sector Dynamic Models with Incomplete Specialization

Eric W. Bond^a and Robert A. Driskill^a
aVanderbilt University

Abstract

We extend the Jones (1971) analysis of the effects of distortions in static 2x2 trade models to the case of a two sector dynamic general equilibrium model of a small open economy with capital accumulation. In contrast to the short run results, the direction of impact of factor market distortions on steady state values do not depend on the value and physical intensity ranking of the sectors. However, the value and physical intensity rankings play an important role in the dynamics in the neighborhood of the steady state. Differences between value and physical intensity rankings of the sectors, which gave rise to paradoxes in the static model, are shown to lead to local indeterminacy or instability in the dynamic model.

JEL Classification: F10, F11

Keywords: dynamics, trade, factor market distortions

Dynamic Three-Factor Models of International Trade

Yunfang Hu^a, Kazuo Nishimura ^b and Koji Shimomura^c
a Graduate School of Economics, Kobe University
^b Institute of Economic Research, Kyoto University
^c Research Institute for Economics and Business Administration, Kobe University

Abstract

Based on the Jones (1971) model, we construct two dynamic models of international trade in which the rate of time preference is either constant or time-varying. The main purpose is to study whether and under what conditions the results derived from the Jones model still hold in the dynamic framework. It is shown that the results of dynamic models may be similar or different to those obtained in the static model. For example, it is possible that, in both static and dynamic models, an increase in a commodity price raises this commodity's output and the rate of return to the specific factor in this sector. However, the effect on the wage rate may be different due to the factor accumulation impact in the dynamic framework.

JEL Classification: D90, F11
Keywords: dynamics, international trade, specific-factor model

Ronald W. Jones and Two-Sector Growth: Ramsey Optimality in the RSS and Leontief Cases

Minako Fujio^a and M. Ali Khan^b
aOtaru University of Commerce, Hokkaido, Japan
^bJohns Hopkins University, Baltimore, MD 21218, USA

Abstract

In this essay, we interpret the value-loss line, familiar in models of undiscounted optimal growth, as delineating the cone of diversification, familiar in models of international trade. This interpretation allows an embedding of the 2-sector Robinson-Solow-Srinivasan (RSS) model in the 2-sector Leontief model, and clarifies situations when the Leontief case offers additional insights into transition dynamics. The geometry underlying this embedding extends an earlier construction due to Khan-Mitra, and it has independent interest.

JEL Classification: D90, C62, O21

Transport Costs and North-South Trade

Didier Laussel^a and Raymond Riezman^b
aGREQAM, University of Aix-Marseille II
^bDepartment of Economics, University of Iowa

Abstract

We develop a simple two country model of international trade that assumes that there is a fixed cost associated with transporting goods across national boundaries. We show that this leads to multiple equilibria that can be Pareto-ranked. One of these equilibria is autarky. We argue that the existence of fixed costs in transport can help explain the low volume of North-South trade.

JEL classification: F1, F11

International Capital Movements: Who Gains and Who Loses?

Morihiro Yomogida
Sophia University

Abstract

In this paper, I explore the impacts of international capital flows on income distribution within countries. Using a simple Ricardian setting with sector-specific capital, I examine whether the owners of capital and workers gain or lose from capital movements relative to a free trade baseline. I show that the structure of commodity demand plays a crucial role in determining the distributional effect of international capital movements.

JEL classification: F11, F21

Keywords: the Ricardian model of trade, capital movements, income distribution

Protection, Skill Formation and Income Distribution

Sugata Marjit
City University of Hong Kong

Abstract

This short paper looks at the process of skill-formation and income inequality for a small developing economy where credit market for financing education or human capital formation is absent. This assumption is more or less consistent with the literature on human capital accumulation under credit market imperfection. We show that protection discourages skill formation and may aggravate inequality. Free-trade puts a check on the problem of acute credit market imperfection by reducing the cost of skill acquisition. We provide an example where freer trade leads to better income distribution for the poor.

JEL Classification: F13, F16, I22

Public Inputs, Urban Development, and Welfare in a Developing Economy

Chi-Chur Chao^a, Jean-Pierre Laffargue^b and Eden S. H. Yu^c
aChinese University of Hong Kong
^bPSE, CEPREMAP and University of Paris I
^cCity University of Hong Kong

Abstract

This paper examines the impact of urban development through the government provision of public inputs in a developing economy. When a financing constraint is taken into account, an increase in public inputs may worsen urban unemployment and hence reduce welfare of the economy. Further, the optimal level of public input provision is larger (smaller) than that under full employment, if there exits a positive (negative) employment effect.

JEL Classification: F11, O18

Keywords: Public inputs, urban unemployment, welfare

Selling "Protection For Sale"

Wilfred J. Ethier
Department of Economics, University of Pennsylvania

Abstract

The Received Theory of trade policy, based solely on terms-of-trade externalities between national governments, has become the conventional wisdom among international trade theorists. But it displays two puzzles that render that theory inconsistent with reality. Significant empirical work, however, supports aspects of the Grossman-Helpman Protection-For-Sale model, a subset of the Received Theory. This paper shows that a simple formulation of the political economy of protection, that dispenses with terms-of-trade externalities, predicts the properties that the empirical work has confirmed, and is free of the counterfactual implications of the Received Theory. The implication is that, despite its claims to the contrary, the empirical literature offers no real support for the Protection-For-Sale model or, therefore, for the Received Theory.

JEL Classification: F02, F13

Competition Policy or Tariff Policy: Which is More Effective?

Makoto Yano^a, Rika Takahashi^b and Jin Kenzaki^c
a Faculty of Economics, Keio University
^b School of Economics, Tokyo International University
^c Economic & Market Analysis, Nikko Citigroup Limited

Abstract

In the recent literature, it has been demonstrated that competition policy can serve as a substitute for tariff policy in creating a beggar-thy-neighbor effect. Common wisdom, however, tells that competition policy is at best the second best in creating such an effect; obviously the first best is tariff policy. The present study demonstrates that this common wisdom no longer holds if a country can impose a tariff on only a part of the entire spectrum of imports. In that case, tariff policy may not be as effective a beggar-thy-neighbor policy as competition policy.

JEL Classification: F11, F13, L13, L42
Keywords: Trade, competition policy, tariff, welfare effects

Liberalizing Trade between Large and Small: The Welfare from Three Different Strategies

Carsten Kowalczyk
The Fletcher School, Tufts University

Abstract

Much trade liberalization involves large and small countries. This paper presents a formal comparison of the economic welfare effects for the small and large country from unilateral free trade by the small country, from a free trade agreement, and from preferential access to the large country's market. I show that it matters for the welfare effects of these strategies whether the small country has an effect on the domestic price in its partner's domestic market or not. For example, if the small country is so small that it does not, then, paradoxically, a reduction of the small country's tariff reduces the large partner's welfare.

JEL Classification: F00, F02, F10, F11, F13, F14, F15
Keywords: small and large countries, free trade areas, unilateral liberalization, preferential market access