technology, geography and trade · technology, geography and trade! j. eaton and s. kortum topics...

Technology, Geography and Trade��J. Eaton and S. Kortum

Topics in international Trade

17.07.2012 Paul Kritzinger 1

Overview


1. Motivation

2. Framework of the model

3. Technology, Prices and Trade Flows

4. Trade Flows and Price Differences

5. Equilibrium

6. Counterfactuals

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

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

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 zi(j) input cost of producing good j in country i is ci (later broken into

cost of labor and intermediate inputs) cost of producing one unit of good j in country i: ci/zi(j)

Geographic barriers – iceberg assumption delivering a unit from country i to country n requires producing dni

units in i dii = 1 for all i

dni > 1 for n ≠ i

Price of good j produced in country i and delivered to country n pni(j) =

€

€

cizi( j)⎛

⎝ ⎜

⎞

⎠ ⎟ dni

3 Technology, Prices and Trade Flows

Utility function to maximize CES objective:

Q(j) – individual goods in amounts Maximization is subject to aggregating budget

constraint across buyers in country n, leading to Xn, country n‘s total spending


€

U = Q( j)(σ −1)/σ dj0

1

∫⎡

⎣ ⎢

⎤

⎦ ⎥

σ /(σ −1)

3.1 Technology

Country i‘s efficiency in producing good j is realization of random variable Zi (drawn independently for each j)

Two important parameters regarding technology country-specific parameter Ti

bigger Ti, 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)


3.2 Prices

Development of the price parameter

summarizes how states of technology around the world... input costs around the world... geographic barriers... ... govern prices in each country n

Two cases: zero-gravity world and autarky

Price index for CES objective function is then:


€

Φn = Ti(cidni)−θ

i=1

N

∑ €

Φ

€

Φ

€

Φ

€

pn = γΦn−1θ

3.3 Trade Flows, and Gravity

Fraction of goods that country n buys from country i

already similarities to the standard gravity equation in bilateral trade, as it is related to importers total expenditures and to geographic barriers


€

Xni

Xn

=Ti(cidni)

−θ

Φn

=Ti(cidni)

−θ

Tk (ckdnk )−θ

k=1

N

∑

3.3 Trade Flows, and Gravity

After some manipulations and substitutions

exporter‘s total sales Qi and importer‘s total purchases Xn enter with unit elasticity

geographic barrier dmi is deflated by importer‘s price level pm: lower pm (due to competition) reduces i‘s access to m in the same way as a geographic barrier does market size of destination m as perceived by country i denominator of right-hand side is total world market from

country i‘s perspective


€

Xni =

dnipn

⎛

⎝ ⎜

⎞

⎠ ⎟

−θ

Xn

dmipm

⎛

⎝ ⎜

⎞

⎠ ⎟

−θ

Xmm=1

N

∑Qi

€

dmi pm( )−θ Xm

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

If overall prices in n decrease relative to prices in market i (higher pi/pn) or if n becomes more isolated from i (higher dni), 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


€

Xni Xn

Xii Xi

=Φi

Φn

dni−θ =

pidnipn

⎛

⎝ ⎜

⎞

⎠ ⎟

−θ

5.1 Equilibrium: Prices split input costs ci into labor and intermediates

Price indices as functions of the parameters of the model and wages

Trade shares as functions of the parameters of the model and wages


€

ci = wiβ pi

1−β

€

pn = γ Ti dniwiβ pi

1−β( )−θi=1

N

∑⎡

⎣ ⎢

⎤

⎦ ⎥

−1/θ

€

Xni

Xn

= πni = Tiγdniwi

β pi1−β

pn

⎛

⎝ ⎜

⎞

⎠ ⎟

−θ

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)

wn is given Yn is aggregate final expenditure and exogenous α fraction spent on manufactures determines manufacturing employment Li


€

wiLi = πnin=1

N

∑ 1− β( )wnLn +αβYn[ ]

5.2 Equilibrium: Labor-Market

Case 2: labor is immobile (number of manufacturing workers in

each country is fixed at Ln)

exogenous nonmanufacturing income determining manufacturing wages wi


€

wiLi = πnin=1

N

∑ 1− β+αβ( )wnLn +αβYnO[ ]

€

YnO

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), dni=1 geographic barriers are prohibitive (autarky), dni for

n≠i

17.07.2012 Paul Kritzinger 15 €

→∞

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 Ti as given, as Li increases, workers move into

production of goods in which country is less productive, driving down wage

increase in technology Tk anywhere raises home wage relative to abroad how much country i benefits from increase in Tk depends on k‘s

labor force if labor force in source country k is small, wk rises more,

diminishing benefits of others


5.3.2 Autarky

Regarding autarky there would be gains from trade for everyone


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


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


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


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


technology, geography and trade · technology, geography and trade! j. eaton and s. kortum topics...

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