First topic

Unilateral free trade

Gains from trade: a multifaceted view

The standard view Terminology: Factors of production: labour, capital, land, natural resources Production possibilities Opportunity costs Absolute / comparative advantage Relative demand / supply

A numerical example
Resources: Home (a1, a2), Foreign (a*1, a*2) Assumptions: Relative price = P1/2 Absence of trade: 1/a2 International trade: 1/a1 x P1/2 Gains: 1/a1 x P1/2 > 1/a2 or P1/2 > a1/a2

w a < w* a* or w/w* < a*/a

A real world example

Textiles industry Romania: 5,000$/worker/year; w = 1.04 $/h Turkey: 24,000$/worker/year; w* = 1.40 $/h w < 0.30 $

Standard view
Implications Free trade makes countries better off even for there are inefficient economies
Efficiency gains and consumption variety

Trade flows and patterns can be predicted

Standard view
Constraints Mobility of factors Cost accounting: social costs (future returns) Trade is impersonal, trade takes place in no time (no history) and outside location (no geography)

Unilateral free trade

Unfavourable external trade opportunity Is retaliation good? It seems a bad response. As Adam Smith argued: It seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them. (1776)

So, is retaliation good?

Economic power Absolute advantage Important exports that other countries need urgently Important imports that other countries would suffer injury

Elasticities price/income elasticity of demand

Estimating the potential of trade

Productivity and exports Factor proportions (e.g. land endowments) Gravity models (economic size and distance) Gravity+ models (partnership and cultural distance) Potential exports (the range is determined by

representative demand in the market area) Potential imports (demand in the home market) [overlapping demands]

Product diversification / differentiation (quantitative

/ qualitative variations)

Representative demand
Entrepreneurs react to profit opportunities of which they are aware Technology/inventions that have been the outcome of an effort to solve some problem which has been acute in ones own environment Proximity to markets is necessary in order that crucial information be funnelled back and forth between producers and consumers [they may override comparative advantages]