Technology, Geography and Trade J. Eaton and S. Kortum. Topics in international Trade

Transcription

1 Technology, Geography and Trade J. Eaton and S. Kortum Topics in international Trade 1

2 Overview 1. Motivation 2. Framework of the model 3. Technology, Prices and Trade Flows 4. Trade Flows and Price Differences 5. Equilibrium 6. Counterfactuals 2

3 1 Motivation Theories of International Trade miss some basic facts: trade diminishes with distance prices vary across locations factor rewards vary across countries relative productivities of countries vary across industries 3

4 2 Framework of the Model Dornbusch, Fischer, Samuelson two-country Ricardian model Ricardian model of international trade based on differences in technology, incorporating geography comparative advantage promoting trade with geographic barriers (transport costs, tariffs and quotas, delay) preventing it Continuum of goods Homogeneous goods and perfect competition Probabilistic formulation of technological heterogeneity 4

5 3 Technology, Prices and Trade Flows Different access to technology, different efficiency across countries and commodities country i s efficincy to produce good j [0, 1] is z i (j) 5 input cost of producing good j in country i is c i (later broken into cost of labor and intermediate inputs) cost of producing one unit of good j in country i: c i /z i (j) Geographic barriers iceberg assumption delivering a unit from country i to country n requires producing d ni units in i d ii = 1 for all i d ni > 1 for n i Price of good j produced in country i and delivered to country n p ni (j) = c i d z i ( j) ni

6 3 Technology, Prices and Trade Flows Utility function to maximize CES objective: U = 1 0 Q( j) (σ 1)/σ dj σ /(σ 1) Q(j) individual goods in amounts Maximization is subject to aggregating budget constraint across buyers in country n, leading to X n, country n s total spending 6

7 3.1 Technology Country i s efficiency in producing good j is realization of random variable Z i (drawn independently for each j) Two important parameters regarding technology country-specific parameter T i bigger T i, high efficiency draw for any good j is more likely (absolute advantage) parameter, common for all countries θ regulating heterogeneity across goods in countries relative efficiencies, bigger θ implies less variability (comparative advantage) 7

8 3.2 Prices Development of the price parameter Φ Φ n = N i=1 T i (c i d ni ) θ summarizes how states of technology around the world... input costs around the world... geographic barriers govern prices in each country n Φ Φ Two cases: zero-gravity world and autarky Price index for CES objective function is then: p n = γφ n 1 θ 8

9 3.3 Trade Flows, and Gravity Fraction of goods that country n buys from country i X ni X n = T i(c i d ni ) θ = T i(c i d ni ) θ N Φ n T k (c k d nk ) θ k =1 already similarities to the standard gravity equation in bilateral trade, as it is related to importers total expenditures and to geographic barriers 9

10 3.3 Trade Flows, and Gravity After some manipulations and substitutions X ni = N d ni p n d mi p m m =1 θ X n θ X m Q i exporter s total sales Q i and importer s total purchases X n enter with unit elasticity geographic barrier d mi is deflated by importer s price level p m : lower p m (due to competition) reduces i s access to m in the same way as a geographic barrier does ( d mi p m ) θ X m market size of destination m as perceived by country i denominator of right-hand side is total world market from country i s perspective 10

11 4 Trade flows and price differences Putting trade flows and price differences into one framework Country i s share in country n relative to i s share at home i s normalized import share in country n X n = Φ i d θ X ii X i Φ ni = p id ni n X ni p n θ If overall prices in n decrease relative to prices in market i (higher p i /p n ) or if n becomes more isolated from i (higher d ni ), i s import share in n declines If force of comparative advantage weakens (higher θ) import shares become more elastic w.r.t. price and geographic barriers 11

12 5.1 Equilibrium: Prices split input costs c i into labor and intermediates c i = w i β p i 1 β Price indices as functions of the parameters of the model and wages N p n = γ T i d ni w β 1 β i p i i=1 ( ) θ 1/θ Trade shares as functions of the parameters of the model and wages X ni γd = π X ni = T ni w i i n β p i 1 β p n θ 12

13 5.2 Equilibrium: Labor-Market Concentration on production and trade in manufactures Two cases used to close the model Case 1: Mobile labor (workers can move freely btw. manufacturing and nonmanufacturing) w i L i = N n =1 π ni w n is given [( 1 β)w n L n + αβy n ] Y n is aggregate final expenditure and exogenous α fraction spent on manufactures determines manufacturing employment L i 13

14 5.2 Equilibrium: Labor-Market Case 2: labor is immobile (number of manufacturing workers in each country is fixed at L n ) w i L i = N n =1 π ni O [( 1 β + αβ)w n L n + αβy n ] Y n O exogenous nonmanufacturing income determining manufacturing wages w i 14

15 5.3 Zero-Gravity and Autarky Impossible to attain analytic solution of interaction among prices in different countries Again, two extremes are considered geographic barriers disappear (zero gravity), d ni =1 geographic barriers are prohibitive (autarky), d ni n i for 15

16 5.3.1 Zero-Gravity Without geographic barriers, law of one price holds The country with higher state of technology relative to its wage will specialize more in manufacturing with immobile labor, wages depend on technology in per worker terms with T i as given, as L i increases, workers move into production of goods in which country is less productive, driving down wage increase in technology T k anywhere raises home wage relative to abroad how much country i benefits from increase in T k depends on k s labor force if labor force in source country k is small, w k rises more, diminishing benefits of others 16

17 5.3.2 Autarky Regarding autarky there would be gains from trade for everyone 17

18 6.1 Gains from Trade Move to autarky for 19 countries: costs of moving to autarky range from one quarter of a percent for Japan to ten percent for Belgium effects of shutting down trade only in manufactures manufacturing labor rises everywhere except Germany, Japan, Sweden, UK (due to comparative advantage in manufactures) Move to zero-gravity world: Germany and Japan experience large drops in manufacturing employment Sweden continues to gain little happens in UK world trade would be about five times its current level if geographic barriers fall by 69%, doubling of trade, welfare rises by 1 to 3 percent 18

19 6.2 Technology vs. Geography With zero gravity, fraction of a country s labor force devoted to manufacturing depends on the state of technology per worker and the wage When geographic barriers are prohibitive, fraction is simply α, share of manufactures in final demand (technology does not matter) If geographic barriers fall smaller countries manufacturing shrinks production to larger countries, cheaper inputs if geographic barriers continue to fall, forces of technology take over, fraction of labor in manufacturing grows 19

20 6.3 Benefits of foreign Technology Trade allows a country to benefit from foreign technological advances Two conditions should be met country must be near the source of advance country needs to be able to reallocate its labor to activities outside manufacturing 20

21 6.4 Eliminating Tariffs General Multilateral Tariff Elimination: almost all countries would gain, welfare rises almost everywhere U.S. Unilateral Tariff Elimination: everyone benefits except the U.S. Trade Diversion in the European Community immobile labor: nonmembers nearby are biggest losers (wages must fall to remain competitive suppliers to EC) members gain 21