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International trade and investment lecture 10
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International trade and investment lecture Krugman, P.R., Obstfeld, M. and Melitz, M.J. (2018), International Trade. Theory and Policy, 11th edition Week 6
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Against free trade: income distributionA. Electoral competition
Median-voter model = political parties will focus on the median voter when
defining future policies. → Voters either have high skills or low skills. It is in
the self-interest of the large group of high-skilled voters to prefer low
tariffs (they consume the low-skill-intensive import good but do not
provide the relevant factor of production). And it is in the self-interest of
the smaller group of low-skilled voters to prefer high tariffs.
→ not convincing argument for analysing, because electoral competition
predicts a focus on the median voter.
B. Collective action and lobbying
→ Central issue: coordination.
C. Influencing the electoral process through collective action
D. Two relevant theoretical insights
1. Redistribution and Pareto efficiency
Pareto efficiency= when it is not possible, via opting for a policy measure or
policy choice, to make one person better off without making another one
worse off.
The move benefits consumers, but producers lose. However, the step
towards free trade increases overall welfare in the country or the winners win
more than that the losers lose.
2. Aggregation of welfare
A move towards free trade out of a situation of autarky brings benefits to one
group in society whereas another group in society loses.
Egalitarian social welfare function (Pigou) = welfare weights are higher for the
poor than for the rich.
Group social welfare function = which the aim is to maximise the welfare of a
particular group within the society.
The conservative social welfare function = any significant absolute reduction
in real income of any significant section of the community should be avoided.
Two advantages of international negotiations and thus trade policy coordination through an
international agreement:
- Mutual and extensive agreements can more easily generate support for liberalising
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