Topics in Trade: Slides

Transcription

1 Topics in Trade: Slides Alexander Tarasov University of Munich Summer 2012 Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

2 Main idea: countries will tend to export those kinds of products for which they have relatively large domestic demand. Two industries with many differentiated products within each of them. We want to show: Countries will be a net exporter in the industry for whose products it has the relatively larger demand. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

3 Setup: Two classes of products: alpha and beta Consumption in one class is c i and in the other class is c i Two population groups: one group of size likes only alpha products, while the other group of size likes only beta products. That is, U = ci θ and Ũ = c i θ i i The technology of production is the same for both industries l i = α + βx i lj = α + β x j Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

4 Demand conditions: Now we have x i = c i x j = cj The labor market clearing condition: n l i + i=1 ñ i=1 lj = +. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

5 Equilibrium in the closed economy: The rm prices are still the same: p i = p j = p = w β θ. Moreover, Finally, x i = x j = n + ñ = (1 αθ β(1 θ) θ) + α Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

6 Equilibrium in the closed economy: To nd n and ñ, we use the budget constraints of each group: npx = w ñ p x = w Therefore, n ñ =. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

7 Equilibrium in the open economy: There are two countries and transport cost of the "iceberg form". We assume that + = + = However, = f = (1 f ) where f 2 (0, 1). That is, in terms of demand, the foreign country is a mirror image of the home country. If f > 0.5, then the home country has the large domestic market for the alpha products and vice versa. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

8 Equilibrium in the open economy: Theorem The home country will be a net exporter of the rst industry's products (alpha products) if f > 0.5. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

9 The rst thing to notice is complete symmetry in terms of labor endowments ( ). Therefore, wage rates are identical w = w. This implies that the outputs and prices are identical as well. p = p x = x. Notice: the key point is symmetry in labor endowments. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

10 BUT! The demand side is different = (1 f ) 6= = f Therefore, n and n are not the same. The pattern of production: the expenditure on goods in an industry is the sum of domestic residents' and foreigners' expenditures on the goods. Therefore, npx = n px = nw n + n τ θ θ 1 n w n + nτ θ θ 1 + nτ θ θ 1 w nτ θ θ 1 + n + n τ θ θ 1 w n τ θ θ 1 + n Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

11 Hence, if n > 0 and n > 0: i.e., some products in the alpha industry are produced in both countries, then n n = σ 1 σ where σ = τ θ θ 1. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

12 If = 1 (demand patterns are the same), then n n = 1. So, we have complete symmetry. However, if is greater than unity (different demand patterns), then n n > 1. So, if there is relatively larger demand for alpha products at home, then the number of rms in this industry is higher at home than at the foreign country. Notice, that then n n < 0. ABSURD!!!! 1 σ > > σ, Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

13 Remember! We assumed that n > 0 and n > 0. It appears that this holds if only 1 σ > > σ. That is, differences in country sizes are not substantial. Countries are quite similar. So, we have specialization! In fact, if If < σ, then n = 0. > 1/σ, then n = 0. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

14 If the two countries have sufciently dissimilar tastes, each country will specialize in the industry for which is has the large home market. Therefore, in this case, each country will be a net exporter of goods in which it specializes. Note that if τ increases, then the range σ, 1 σ becomes wider, therefore the higher is possibility of incomplete specialization. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

15 Now, suppose incomplete specialization. That is, n > 0 and n > 0. Then, each country will both import and export products in both classes. But, it is still the case that the home market effect takes place. Assume that > 1, that is the home country has a larger market for alpha products. Then, the trade balance in alpha products is given by since n > n. B α = nτ θ θ 1 w = nτ θ θ 1 + n σw 1 σ ( ) > 0, n τ θ θ 1 w n τ θ θ 1 + n Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

16 The Krugman model: Testing The Home Market Effect Davis and Weinstein (2003) Recall that in the Krugman model, n n = σ 1 σ. That is, n n = 1 σ2 1 σ 2. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

17 The Krugman model: Testing The Home Market Effect Davis and Weinstein (2003) It can be shown that n n That is, a rise in the relative demand, by more than one. = 1 σ2 1 σ 2 > 1., leads to a rise in the relative production An equivalent formulation (Davis and Weinstein (2003)): idiosyncratic demand patterns have a magnied impact on production patterns. The elasticity is greater then one. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

18 The Krugman model: Testing The Home Market Effect Davis and Weinstein (2003) The traditional H-O model: Consider a positive shock to the home demand structure for a good. If the production set is strictly convex, the demand shock causes the relative price of the good to rise. This in turn increases the production of good in both countries. Therefore, the idiosyncratic demand will be partly met additional local supply and partly by higher imports. ocal supply moves less than one-for-one with the idiosyncratic demand. Hence, there is a key difference between two types of models: the elasticity of production subject to idiosyncratic demand. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

19 The Krugman model: Testing The Home Market Effect Davis and Weinstein (2003) Methodology: Three levels of aggregation: industries, goods, and varieties. A good is a collection of a large number of varieties produced under monopolistic competition (alpha and beta goods). Industries consist of a collection produced using a common technology: simple eontief input coefcients. Technology within an industry is the same for all goods and varieties. The number of factors is equal to the number of goods. All countries share identical technologies of production. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

20 The Krugman model: Testing The Home Market Effect Davis and Weinstein (2003) Methodology: The key idea is that endowments determine only the industry-level output and tell nothing about the composition of production across the goods within an industry. In fact, we need to know the consumer preferences! Varieties can be considered as a composite factor of production-an analogue to the single factor "labor" in Krugman (1980). Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

21 The Krugman model: Testing The Home Market Effect Davis and Weinstein (2003) Methodology: Suppose there are no differences in the preferences across the countries (no idiosyncratic elements of demand), then each country allocates its resources across the goods within a particular industry in the same proportion as all other countries. This provides the country with a base level of production for each good in an industry: SHARE. The second component of production arises when there are idiosyncratic elements of demand across the goods: IDIODEM. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

22 The Krugman model: Testing The Home Market Effect Davis and Weinstein (2003) Methodology: D ngc is the derived (estimated) demand for good g from industry n in country c. D ngrow is the demand for the rest of the world. γ ngrow X ngrow X nrow is the share of good g (in industry n) in the rest of the world (varies with c). δ ngc D ngc D nc is the share of good g in industry n 0 s derived demand in country c. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

23 The Krugman model: Testing The Home Market Effect Davis and Weinstein (2003) Then, SHARE ngc = γ ngrow X nc and IDIODEM ngc = δ ngc δ ngrow Xnc where δ ngc δ ngrow measures the extent to which the relative demand for a good within an industry differs from that in the rest of the world. If all countries demand goods in the same proportion, then IDIODEM is identically zero. If the relative demand for a good in one country is higher (lower) than that in the rest of the world, IDIODEM is positive (negative). Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24

24 The Krugman model: Testing The Home Market Effect Davis and Weinstein (2003) The Regression: X ngc = α ng + β 1 SHARE ngc + β 2 IDIODEM ngc + ε ngc. We can distinguish three hypothesis: If there are no trade costs, then the location of demand does not matter and β 2 = 0. If trade is costly, but there is no home market effect, then β 2 2 (0, 1] The home market effect: β 2 > 1. Alexander Tarasov (University of Munich) Topics in Trade: ecture 5 Summer / 24