Gains From Trade

12 Key excerpts on "Gains From Trade"

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  Government Intervention in Globalization

  Regulation, Trade and Devaluation Wars

  • C. Peláez(Author)
  • 2008(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  89 Introduction In a rare consensus, economists tend to agree, with important exceptions, that there are benefits from trade in the form of more efficient resource allocation. The first section below provides the important analysis of the Gains From Trade. The relaxation of the conditions of the first-best of efficiency leads to the analysis of distortions or market failures that motivate more analysis. The main principle is to correct domestic distortions with domestic policy instruments, allowing the economy to obtain the benefits from trade. It is difficult to relate empirically trade openness and economic growth. The US uses antidumping and safeguard sanctions that many con- sider to be disguised protectionism. One of the most debated issues in policy is whether employment and wages of less skilled workers in advanced countries decline because of trade in goods produced by cheap labor, which are exported by developing countries. In 2004, the issue of losses of services jobs to offshore locations received dispropor- tionate attention in the press and public debates. The summary provides some conclusions. The Gains From Trade The basic analysis of the desirability of international trade focuses on the Gains From Trade. It is one of the first analyses of welfare economics: the wellbeing of the state of free trade of goods and services with other nations versus the state of no trade. There is the important proposition that some trade is better than no trade. Even trade with restrictions such as quotas and tariffs is better than no trade. A quota is a quantitative 6 International Trade of Goods and Services 90 Government Intervention in Globalization limit on imports, which are purchases from other countries, or exports, which are sales to other countries.

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  International Trade and Economic Growth

  • Hendrik Van den Berg, Joshua J Lewer(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Chapter One The Welfare Gains From Trade

  The proposition that freedom of trade is on the whole economically more beneficial than protection is one of the most fundamental propositions economic theory has to offer for the guidance of economic policy.

  (Harry Johnson)6

  Economists have made their case for free trade in two ways. First, they have developed logical models to prove international trade increases human welfare. These models have also provided useful insights into why international trade increases human welfare. Second, economists have used their models to estimate the welfare gains from reducing or eliminating barriers to trade. Since theoretical models are not easy to summarize into a short sound bite, the news media have often presented economists’ numerical estimates of the Gains From Trade as economists’ main contribution to the debate about trade. Economists themselves often use estimates of the Gains From Trade to support their more abstract arguments for free trade.

  When it comes to the estimates of the Gains From Trade, economists are actually quite vulnerable. For one thing, in going from the basic logic of comparative advantage to specific estimates of the gains from free trade, economists are forced to make specific assumptions about the shapes of the curves, the elasticities of demand and supply, and the distribution of the gains and losses across economic sectors. Different economists make different assumptions and thus come up with different estimates. The differences between the estimates often undermine the credibility of economists. More damaging to their case for free trade, however, is the fact that economists’ estimates of the Gains From Trade are usually very small. Objective observers cannot help but ask whether the inevitable controversy surrounding shifts in trade policy are worth all the fuss.

  This chapter examines how economists have estimated the Gains From Trade. Since most of the popular estimates of the Gains From Trade have been based on the strict logic of the equally popular static models of international trade, the chapter begins by reviewing these models and how estimates are derived from them. A careful examination of the estimates makes it clear that many potential Gains From Trade have been missed by the most popular estimates of the Gains From Trade. It becomes obvious that the estimated Gains From Trade have been small because the models used to guide the estimates do not capture all of the Gains From Trade. The next section begins our reexamination of economists’ models of international trade and how those models are used to estimate the welfare effects of international trade.

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  Microeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Foreigners buy U.S. products too—grain, aircraft, movies, software, higher education, trips to New York City, and millions of other goods and services. For example, California grows 80 percent of the world’s almond supply. In this chapter, we examine the gains from international trade and the effects of trade restrictions on the allocation of resources. The analysis is based on the familiar tools of demand and supply. Topics discussed in this chapter include: • Gains From Trade • Absolute and comparative advantage revisited • Tariffs and quotas • Cost of trade restrictions • Free trade agreements • World Trade Organization, or WTO • Common market • Arguments for trade restrictions 19-1 The Gains From Trade A Virginia family that sits down to a dinner of Kansas prime rib, Idaho potatoes, and California string beans, with Georgia peach cobbler for dessert, is benefiting from inter-state trade. You already understand why the residents of one state trade with those of another. Back in Chapter 2, you learned about the gains arising from specialization and trade. You may recall how you and your roommate could maximize output when you each specialized. The law of comparative advantage says that the individual with the lowest opportunity cost of producing a particular good should specialize in that good. Just as individuals benefit from specialization and trade, so do states and, indeed, na-tions. To reap the gains that arise from specialization, countries engage in international trade. Each country specializes in making goods with the lowest opportunity cost . 19-1a A Profile of Exports and Imports Just as some states are more involved in interstate trade than others, some nations are more involved in international trade than others. For example, exports account for about one-quarter of the gross domestic product (GDP) in Canada and the United Kingdom; about one-third of GDP in Germany, Sweden, and Switzerland; and about half of GDP in the Netherlands.

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  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  Without international trade, they may have little ability to benefit from comparative advantage, slicing up the value chain, or economies of scale. Moreover, smaller economies often have fewer competitive firms making goods within their economy, and thus firms have less pressure from other firms to provide the goods and prices that consumers want. The economic gains from expanding international trade are measured in hundreds of billions of dollars, and the gains from international trade as a whole probably reach well into the trillions of dollars. The potential for Gains From Trade may be especially high among the smaller and lower-income countries of the world. 494 20 • International Trade Access for free at openstax.org LINK IT UP Visit this website (http://openstax.org/l/tradebenefits) for a list of some benefits of trade. From Interpersonal to International Trade Most people find it easy to believe that they, personally, would not be better off if they tried to grow and process all of their own food, to make all of their own clothes, to build their own cars and houses from scratch, and so on. Instead, we all benefit from living in economies where people and firms can specialize and trade with each other. The benefits of trade do not stop at national boundaries, either. Earlier we explained that the division of labor could increase output for three reasons: (1) workers with different characteristics can specialize in the types of production where they have a comparative advantage; (2) firms and workers who specialize in a certain product become more productive with learning and practice; and (3) economies of scale. These three reasons apply from the individual and community level right up to the international level. If it makes sense to you that interpersonal, intercommunity, and interstate trade offer economic gains, it should make sense that international trade offers gains, too.

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  The Economics of Industrial Development

  • John Weiss(Author)
  • 2010(Publication Date)
  • Routledge

    (Publisher)

  trade costs ).

  The basis for the potential gains from international trade is specialisation in the production of goods which a country can produce relatively cheaply, that is specialisation along the lines of comparative advantage . Since the comparison is between costs of goods within one country, there must always be something in which that country has a comparative advantage, in that a good is cheap relative to everything else that the country can produce. A majority of the goods that are sold on world markets are a form of manufactured product; hence, how far countries can take advantage of the potential Gains From Trade will have a large impact on their manufacturing sectors.

  Gains From Trade

  Drawing on international trade theory, many have argued that unlike the arguments in Chapter 2 , it is not meaningful to distinguish between broad sectors, like manufacturing or agriculture. In this view, it is far more important to differentiate between activities that produce goods that can be bought and sold on the world market (tradable sectors ) and those that focus exclusively on the domestic market (non-tradable sectors ).1 In addition, within tradables, given the vast range of possible products, there will be only a limited number in which an economy has a comparative advantage.

  This reasoning is associated with Neoclassical or market-based views of development that stress the importance of specialising on the basis of an economy’s comparative advantage. Hence, it is not manufacturing per se that is important, but within manufacturing the goods that a country can produce relatively efficiently and thus export successfully to the rest of the world. There are different explanations for comparative advantage differences between countries corresponding to different theories of trade. Cost differences can arise though differential access to technology (Ricardian models), different resource endowments (Heckscher-Ohlin models) or increasing returns to scale (New Trade Theory

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  Development Economics: A Policy Analysis Approach

  • Eckhard Siggel(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  The importance of trade for economic development is often measured by its share of GDP. While in large countries trade tends to play a relatively minor role, possibly less than ten percent of GDP, small countries depend more strongly on imports and need to export proportionately more. This relationship between the proportion of trade and country size reflects the availability of resources and the size of markets. Large countries are more likely to possess most of the natural resources they require, and their markets are sufficiently large to produce industrial goods benefiting from economies of scale. Small countries, require export markets in order to produce economically at large scale. They are also likely to import many goods at prices that are lower than their own potential costs of production. In the rest of the chapter we shall focus first on the main rationale for trade and the Gains From Trade, and then examine the arguments against free trade. Next, we discuss the instruments and consequences of inward-oriented trade regimes, as well as trade policy reforms and outward orientation.

  5.1 Comparative Advantage and the Gains From Trade

  International trade is known to be beneficial to countries that specialize in activities, in which they have comparative advantage. The principle of comparative advantage, which was first rigorously analyzed by Ricardo, is one of the most fundamental ones in economics. It states that even if a country is less productive in all activities than other countries, it can nevertheless gain from trading with these countries, provided that it specializes in those activities in which it is relatively more productive. The greater relative productivity is measurable as opportunity cost, which poses no conceptual problems as long as we analyze the simple case of two activities, two countries and a single factor of production, as Ricardo did in his famous demonstration of comparative advantage. To recall, let the two goods, food (F) and clothing (C), be produced in both, the Home country (H) and a foreign country (F). We assume for simplicity that only one factor of production, labour, is used and that the following amounts of labour per unit of output (LF and LC ) are required:

  Home	Foreign
  Food	5	6
  Clothing	10	18

  The opportunity cost of clothing in terms of food equals the factor input ratio, LC /LF

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  International Economic Policies and Their Theoretical Foundations

  A Sourcebook

  • John M. Letiche(Author)
  • 2014(Publication Date)
  • Academic Press

    (Publisher)

  The general in-dustry of the country . . . will not thereby be diminished . . . but only left to find out the way in which it can be employed with the greatest advantage. 3 David Ricardo and Robert Torrens corrected Smith's theorizing to show that a country can gain from trade even if it has no absolute real cost advantage in the production of any commodity. The early theory of comparative cost was formulated in terms of a single factor of production (labor) and assumed that, in the absence of trade, goods were exchanged internally at their relative unit labor cost. In the case of free trade, Gains From Trade resulted when countries specialized in the production of those commodities in which they had a comparative advantage, denoted by the respective ratio of productivity of the resources between the countries concerned. 4 The case for a large volume of profitable trade, it was held, depends on the width of these gaps in comparative advantage of different coun-tries for the production of different goods. If a country has an absolute PART II. TERMS OF TRADE AND Gains From Trade 81 advantage in agriculture, this does not stop it from specializing in some-thing in which it has a greater advantage still. The comparative-cost ap-proach, in effect, emphasized that trade minimizes the aggregate real cost at which a given level of real income can be obtained or maximizes the aggregate level of real income obtainable from a given (full employment) utilization of resources. Theoretical contributions made by J. S. Mill, Alfred Marshall, F. Y. Edgeworth, and F. W. Taussig demonstrated that comparative costs are an essential element in the Gains From Trade, but that reciprocal demand functions have to be incorporated into the analy-sis insofar as they are welfare functions representing net income. s In this connection Mill contributed a brilliant discussion on the rela-tionship between reciprocal demand and the commodity terms of trade.

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  The Political Economy of International Trade

  • Ken Heydon(Author)
  • 2019(Publication Date)
  • Polity

    (Publisher)

  Part I The Gains From Trade: Winners and Losers Passage contains an image

  1 The Political Economy of Trade: The Domestic Setting

  The legislature, were it possible that its deliberations could be always directed not by the clamorous importunity of partial interests, but by an extensive view of the general good.

  Adam Smith The Wealth of Nations IV ii 44, 471–2

  Trade theory, from the classical models to the New Trade Theory, posits that, with qualifications about the distributional effects, liberal trade brings net gains to welfare. Why then is it so hard to achieve? This chapter – after outlining the key theoretical work – will cover the challenge arising from the concentrated costs and dispersed gains of trade liberalisation and the widespread perception that trade is the primary cause of structural disruption and rising income inequality within the advanced economies. Other explanations of rising inequality will be considered. The chapter will also address the role of special interest groups, the collective action problem and the contrasting ways in which the United States and European Union have used governmental arrangements to try to limit the influence of special interests. Policy implications will be drawn.

  The Political Economy of Trade: The Three Elements

  There are three strands to the political economy of trade: trade and trade liberalisation yield net gains in welfare, but the gains are unevenly divided among winners and losers, leading to interest-group pressure among losers to resist market opening. Each of these elements has a strong theoretical1

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  The Science of Economic Development and Growth: The Theory of Factor Proportions

  The Theory of Factor Proportions

  • C.C. Onyemelukwe(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  It is clear that if the poorer trading partner wishes to move in the direction of equalizing its standard of living (growth potential) with that of the more affluent partner, it cannot achieve this from free trade. Another way to put it is that free trade changes the microstructure of economies but not necessarily in the direction of macroeconomic growth.

  Samuelson and Nordhaus summarized what they considered as the economic gains for trade as follows: “When trade has opened up, and when each country concentrates on its area of comparative advantage, everyone is better off.” They define “better off” as a situation where “workers in each region obtain a larger quantity of consumer goods for the same amount of work when people specialize in the areas of comparative advantage and trade their own production for goods in which they have relative disadvantage. When borders are opened to international trade, the national income of each and every trading country rises.”3 Seen in the context of the issues raised, it can be seen that the root to economic growth of poor countries does not lie in international trade.

  Economists have analyzed international trade in terms of a two-factor economy, rather than Ricardo’s one-factor economy, because Ricardo’s model fails to capture the changes trade can make in income distribution. Bowen, Hollander, and Viaene have indicated that “overall, the Ricardian model seems to raise more questions about the sources of comparative advantage than it answers” and that it “provides no guide as to how labor productivity and comparative advantage can be expected to evolve since it gives no explanation of differences in labor productivities across countries.”4 More serious is a point we had made in earlier chapters that labor productivity is not a suitable economic index when countries differ widely in their factor proportions.

  In what is called the specific factors model, the assumption is that an economy produces two goods and that we can allocate labor supply between the two sectors. Unlike the Ricardian model, this model provides for the existence of factors besides labor, but whereas labor is said to be a mobile factor, the other factors are said to be specific.5

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  Essentials of Economics

  • James D Gwartney, Richard Stroup, J. R. Clark(Authors)
  • 2014(Publication Date)
  • Academic Press

    (Publisher)

  PART FIVE ^ ^ ^ ^ ^ ^ . ^ ^ k L. ^ ^ V r r r r mj Y « m r r m m r W r V À A r A •'W À A m m A m m m A m m m r AÎ 1 1 w Am m m V A m m m r A m m m r A m m m r A m m m r m m m r m m m r A A r A AmmWT V Am. AÎ Am Am ^ ^mv k. A A ^ . Am ^ Am j A A A A A A A A A A INTERNATIONAL ECONOMICS This page intentionally left blank //' a foreign country can supply us with a commodity cheaper than we ourselves can make it, /we had/ better buy it of them with some part of our own in-dustry, employed in a way in which we have some advantage. The general industry of the country will not thereby he dimin-ished, but only left to find out the way in which it can be employed with the greatest advantage.' Adam Smith 21 GAINING FROM INTERNATIONAL TRADE We live in a shrinking world. Wheat raised on the flatlands of western Kansas may be processed into bread in a Russian factory. The breakfast of many Americans might include bananas from Honduras, coffee from Brazil, or hot chocolate made from Nigerian cocoa beans. The volume of world trade, en-hanced by improved transportation and communications, has grown rapidly in recent years. In 1979, the total trade among nations was approximately $3 trillion. Approximately 16 percent of the world's total output is now sold in a different country than that in which it was produced—double the figure of two decades ago. In this chapter, we will analyze the impact of foreign trade on the price, consumption, and domestic production of goods. The effects of trade restrictions, such as tariffs and quotas, will also be considered. International trade is an area of economics where fallacies seem to abound. Indirect effects are often ignored. As we progress, we will discuss several examples of economic nonreasoning. THE COMPOSITION OF THE INTERNATIONAL SECTOR As Exhibit 1 shows, the size of the trade sector varies among nations.

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  The Essence of International Trade Theory

  • Noritsugu Nakanishi(Author)
  • 2018(Publication Date)
  • WSPC

    (Publisher)

  gains-from-trade proposition:

  Proposition 4.5 (Gains from Free Trade). A country is better-off (not worse-off) under free trade than in autarky.20

  Proof. Let , , , be the consumption, production, price vectors, and the utility level in autarky, respectively; also, let x, y, p, u be the corresponding variables under free trade. The expenditure function corresponding to U and the GDP function of this country are denoted by E and Y, respectively. Obviously, we have = U( ) and = in autarky, and u = U(x) and px = E(p, u) = Y(p) = py under free trade. Then, we obtain the following relation:

  By the definitions of Y and E, we have Y(p) − p ≥ 0 and p − E(p, ) ≥ 0. Hence, E(p, u) − E(p, ) ≥ 0. Since E is increasing in the utility index, we obtain u ≥ .

  The first bracketed term in the right-hand side of Eq. (4.6) is called the production gain (or the specialization gain) and the second is called the consumption gain (or the substitution gain). The trade gain can be decomposed into these two non-negative effects. If the production possibility frontier has a sufficient curvature or if the indifference surface does so, one of the production gain and the consumption gain will become strictly positive. In this case, the trade gain will be strictly positive (i.e., u > ).

  Figure 4.3 illustrates the Gains From Trade and its decomposition into the production gain and the consumption gain. Curve ab represents the production possibility frontier (PPF) of a country. The autarkic equilibrium is attained at point e at which the PPF and an indifference curve are tangent with each other. The slope of the common tangency line represents the autarkic equilibrium price . Let us consider trade liberalization of the country. Suppose that the world market price p is higher than in autarky as represented by the slope of line ℓ. The production point moves from point e to point y, where the marginal rate of transformation is equal to p. The budget line under free trade is represented by line ℓ; then the consumption point will be point x at which the budget line and an indifference curve u are tangent. Clearly, the household enjoys a higher utility level (i.e., u > ) than at point e

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  Studies in the Theory of International Trade

  • Jacob Viner(Author)
  • 2016(Publication Date)
  • Taylor & Francis

    (Publisher)

  index of total gain from trade would be

  One advantage of a total gain index over a unit gain index would be that it would clearly show that an increase in the total amount of gain from trade was consistent with an unfavorable movement in the index of unit gain from trade if the unfavorable change in the latter was associated with an increase in the volume of trade.17

  Terms of Trade and the International Division of Gain from Trade

  .—J. S. Mill seems to have believed that the commodity terms of trade, taken in conjunction with its comparative costs, provided a criterion of the proportions in which the total gain from the trade of a particular country with the outside world was divided between that country and the rest of the world. He did not state clearly how he would determine the proportions in any particular case, given the actual terms of trade and the two limiting sets of cost ratios, but in one illustrative case, where costs of producing cloth and linen were in the ratio of 15:10 in England and of 20:10 in Germany, and where the actual terms of trade were 10 English cloth for 18 German linen, Mill says that “England will gain an advantage of 3 yards on every 15, Germany will save 2 out of every 20.”18 Cournot interprets this passage as postulating that England has a gain of 20 per cent and Germany a gain (or economy) of 10 per cent, although no percentages appear in Mill’s text. He points out, first, as ground for rejecting this mode of measuring the comparative gain from trade of two countries, that if one of the commodities could not be produced in England at any cost the English percentage of gain from trade would be infinite. He proceeds to a further criticism on mathematical grounds, which seems to me both unimportant of itself and irrelevant to Mill’s position unless it can be shown that Mill thought that England and Germany would, in his illustration, divide the Gains From Trade in the proportions of 20 and 10. Cournot says that it would be equally legitimate to hold that England as the result of trade gets 15 yards of linen for 8 1/3 yards of cloth instead of for 10 yards of cloth, a saving of 16 2/3 per cent, while Germany obtains, as the result of trade, 11 1/9 yards of cloth instead of 10 yards of cloth, for 20 yards of linen, a gain of 11 1/9 per cent. Measured this way, the ratio of the English to the German gain is 16 2/3: 11 1/3, instead of 20:10. “Or, les questions de calcul n’admettent pas de telles ambiguités. C’est qu’à vrai dire l’une et l’autre manière de compter sont purement arbitraires.”19

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