Overview Notes- Trade Theories and Research Papers
Krugman Reading
General equilibrium model of noncomparative advantage trade driven by economies of scale (internal to firms)
Scale economies->imperfect competition
Trade and gains from trade in economies w/ identical tastes, tech, factor endowments
Economies of scale provide alternative to dif in tech or factor endowments as explanation of international specialization and trade
Three (3) stages to solve
1. Analyze demand curve facing individual firm
2. Deriving pricing policy of firms and relate profitability to output (profit maximizing behavior) derive profit maximizing output to find profit max price profits zero in eqm- driven to zero by entry of new firms
MR=MC; Avg Rev=Avg Cost
3. Use analysis profitability and entry to determine number firms
Three (3) effects of market increase
1. Labor force growth
Increase in labor force shifts ZZ shift left (decrease)
Output/consumption (ci or qi depending on notation) per worker falls, p/w falls
This implies w/p (real wage) rises and consumers better off with more variety/increased choice
Thus, welfare INCREASES
2. Trade countries have identical tastes and technologies, one factor model so no differences in factor endowments
In model BOTH trade and gains from trade
Wages and prices equalize across borders by symmetry and zero transport costs
Effect of trade same as if both countries had increased labor force
See above for welfare effects
Direction of trade is indeterminate
Each good produced in only one country because no reason for firms to compete for markets
Volume of trade determinate
Volume of trade as fraction world income maximized when economies of equal size
Economies of scale can give rise to trade and gains from trade even when no international differences in tastes, tech, or factor endowments
3. Factor Mobility parallel with H-O theory
In H-O world, trade and factor mobility substitutes
Factor movements induced by impediments to trade (i.e. tariffs, transport costs)
If no barriers to trade, incentive for
General equilibrium model of noncomparative advantage trade driven by economies of scale (internal to firms)
Scale economies->imperfect competition
Trade and gains from trade in economies w/ identical tastes, tech, factor endowments
Economies of scale provide alternative to dif in tech or factor endowments as explanation of international specialization and trade
Three (3) stages to solve
1. Analyze demand curve facing individual firm
2. Deriving pricing policy of firms and relate profitability to output (profit maximizing behavior) derive profit maximizing output to find profit max price profits zero in eqm- driven to zero by entry of new firms
MR=MC; Avg Rev=Avg Cost
3. Use analysis profitability and entry to determine number firms
Three (3) effects of market increase
1. Labor force growth
Increase in labor force shifts ZZ shift left (decrease)
Output/consumption (ci or qi depending on notation) per worker falls, p/w falls
This implies w/p (real wage) rises and consumers better off with more variety/increased choice
Thus, welfare INCREASES
2. Trade countries have identical tastes and technologies, one factor model so no differences in factor endowments
In model BOTH trade and gains from trade
Wages and prices equalize across borders by symmetry and zero transport costs
Effect of trade same as if both countries had increased labor force
See above for welfare effects
Direction of trade is indeterminate
Each good produced in only one country because no reason for firms to compete for markets
Volume of trade determinate
Volume of trade as fraction world income maximized when economies of equal size
Economies of scale can give rise to trade and gains from trade even when no international differences in tastes, tech, or factor endowments
3. Factor Mobility parallel with H-O theory
In H-O world, trade and factor mobility substitutes
Factor movements induced by impediments to trade (i.e. tariffs, transport costs)
If no barriers to trade, incentive for