Lecture 9

• free trade benefits everyone on average, but there are winners and losers within each country
• job losses from trade are generally concentrated in specific industries, which can increase inequality
• losers from trade can be compensated by the winners, which then means everyone benefits from free trade
• a strong social safety net or job retraining programme is important for encouraging trade and sharing the benefits
• imports and exports as a share of GDP have risen over the last 50 years, and are now far more significant
• trade has become more significant because transportation costs have declined, especially via shipping channels
• countries have reduced their tariffs and quota barriers, which increases the amount of trade done
• there were big changes to the US trade balance as a share of GDP from the mid-1970s until the Global Financial Crisis
• globally, trade must be balanced, as the world is a closed economy
• the US as a modern economy means that someone else produces most of the goods that an individual consumes, with that person/country specialising in one product
• in a Robinson Crusoe economy, each person produces all the goods they consume, in an unrealistic, inferior way of organising an economy
• The motivation behind trade is that people value good that other people produce more that they value what they currently own.
• Trade is balanced when a country runs neither a trade surplus nor deficit
• countries trade over time to neutralise impacts of shocks and smooth consumption during natural disasters etc
• in good times, countries can run trade surpluses, and in bad times they run deficits, which smooths consumption, and in the long run their trade is balanced
• the countries budget constraint shows that trade deficits must only be temporary, and fully paid off in the future
• When a country runs a trade deficit, EX < IM, investment is higher than consumption, which increases productivity and makes it easier to balance in the future
• in the long run, trade must balance, and the country experiences a budget constraint where PDV of the balance must = 0
• when running a trade deficit, investment is funded by the deficits to be higher than consumption
• countries can run trade deficits when it expects rapid growth in the future, or has productive investments to make
• A country will want to run large trade deficits if the country's growth is expected to be faster than the average global growth rate
• the fastest growing countries in the world run trade surpluses, which may stimulate economic growth via stronger global connections
• within quickly growing economies running trade surpluses, firms that export large amounts may be rewarded with subsidies
• if workers can work wherever they want, they will all move to a the more productive country, as that is where wages are higher
• free trade relies on comparative advantages
• free migration relies on absolute advantages
• when looking at trade in inputs, it is assumed that workers are all identical, and a country is more productive due to location; not worker quality
• compared to autarky, all welfare benefits of free migration go to the migrants. This is because their productivity increases
• under free trade, welfare improvements are shared between the workers in both countries
• free migration and free trade both have unequal distributions of gains from liberalisation
• the world in general is more efficient under free migration
• the gains that immigrants receive from free migration can be in part paid to the domestic workers to make them more willing to accept free migration, not just free trade
• An absolute advantage is when one country can produce a good more cheaply than another country
• a country can have an absolute advantage in producing all goods, but still benefit from trade, even though the trading partner is weaker
• when there is an absolute advantage, it is more efficient
• a comparative advantage is when the relative price of a good is lower than in another economy
• in Autarky, all economies are closed to trade
• trade makes people better off by allowing them to buy their goods from where they are cheap
• trade improves efficiency and welfare in all countries
• trade makes those that are more productive even better off, which increases inequality