Refresher lecture
September 4, 2022 8:39 PM
Title: Ricardian theory, HOS theory, Melitz theory and firm differentials,
Ricardian trade theory
• Countries trade because of differences in technology
• Regardless of having absolute advantages, a country would still trade because of
comparative advantages
• Wages are determined by absolute advantages
• Product of specialization is determined by absolute advantages
• Countries would completely specialize in producing the product with the lower
opportunity cost
• It works because consumers look for the lowest price (law of one price)
Hecksher Ohlin model (factor endowment)
• Many similarities w/ Ricardian model but it explains trade happens due to factor
endowments
• HOS makes different assumptions but also makes the case for trade due to differences
• Trade enhances global welfare
• With free trade:
• K-rich countries export K-intensive goods. Ditto for L as a factor.
• Demand for imports increases production
• Demand of production increases factor used in export industry
• Relative price of factors converge across trading countries (Factor Price
Equalization - FPE)
• There are gains of trade in terms of welfare
Melitz model and firm protagonist
• Does not assume constant returns to scale any longer (as opposed to both of the former)
• Increasing returns to scale or monopolistic competition help decipher better today's
trade reality
○ Some firms have economies of scope and scale, allowing them to have
increasing returns to scale (decreasing average costs)
• There are large differentials across industries between exporters and non-exporters
• Because firms are not identical, some will be better able to conquer the market
Money Matters
• Prices are not only determined by technology/factor endowment or strategic firm
interaction, but also by monetary factors (i.e.: exchange rates)
• Any monetary factors that affect money supply or demand affects international
prices and exchange rates
Summary:
FDI Page 1
,Lecture 1
September 6, 2022 11:03 AM
Title: Globalization
Globalization, what is it?
HD theory and • Theory vs. Practice:
practice diverge in
views about trade • Theory: Textbooks say that globalization is beneficial (welfare enhancing) because it
impacts? allows division of labor and specialization.
• Practice: governments face challenges to maximize gains of trade but minimize
their losses (i.e.: trade exposure decreasing employment)
WR the 2 waves of • Globalization is not a new phenomenon, though it has accelerated.
globalization? • 1st wave: Modern globalization started around 1800s.
• 2nd wave: started since 1950s
• Driven by a steady decline in the cost of moving goods, people, capital and
ideas. Supported by GATT/WTO.
• Integrated world started global competition.
• Interdependence on trade and capital flows.
• Economic effects: convergence in commodity prices, reshuffling of
resources , changes in incomes and output.
WI globalization?
Was the silk/spice • Globalization is international trade with competition
trade globalization? • If there is no domestic alternative, there is no domestic competition so it cannot be
Why (not)? globalization (i.e.: Silk and spices trade was not globalization because there were no
Is globalization domestic producers. It was just international trade)
beneficial?
• Globalization is beneficial. Why else would you do it?
WR some types of • Varieties of globalization:
globalization? • Cultural: set of universal cultural variables and the extent to which these displace
embedded national cultures.
• Institutional: spread of “universal” institutional arrangements and common
practices.
• Geographical: compressed time and space as a result of reduced travel time
between locations and the rapid exchange of information.
• Economic: decline of national markets and the rise of global markets as the firm’s
focal point for output and input.
• causes convergence of (factor) prices.
WR the 3 consequences
of globalization? Consequences & Stylized facts
1. Consequence I: Trade flows become global (tiny cost differences have large consequences)
WD global trade flows
mean for competition? • Stylized facts:
• Transport costs and price differences are indeed decreasing, but not
HD the stylized facts disappearing.
support/oppose this • Trade is becoming more important: value of exported goods as share of GDP
consequence?
(transport costs, is increasing.
price differences, • However, distance has not become irrelevant, even though transportation
role of distance) costs have declined.
▪ Prices have not converged, even though political barriers (tariffs) have
declined
□ Regional trade remains the larger part of trade
Trade barriers have not disappeared:
◊ Logistics performance (i.e.: cost, delay, and
reliability) and trade facilitation bottlenecks (i.e.:
border control and transit systems with third
countries)
◊ International connectivity (i.e.: existence of regular
maritime, air, or terrestrial services)
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, maritime, air, or terrestrial services)
◊ Non-tariff measures
▪ Gravity equation still holds: Distance (cultural, geographical,
institutional) is still a determinant for trade
2. Consequence II: Relocation of firms
WR the motivations • Motivations for vertical vs. horizontal FDI:
for vertical FDI? • Vertical: lower costs (i.e.: wages, taxes, etc..). Lower = better…
And horizontal FDI? • Horizontal: market access (i.e.: be closer to new and rich customers)
• Stylized facts: Despite the believe that costs are lower in developing countries (low
HD the stylized facts wage motive), advanced economies are still the main receivers (and have been) of
support/oppose this FDI.
consequence?
• Horizontal FDI might be dominant.
WD this mean for what
kind of FDI
dominates?
•
WD the 'race to the 3. Consequence III: Relocation of activities (race to the bottom)
bottom' mean?
• Stylized facts:
• Inequality across countries is decreasing but inequality within countries is
HD the stylized facts increasing
support/oppose this
consequence? • Milanovic: there are winners and losers (in both developed and developing
(inequality countries) of the global race:
across/within ▪ Winners: middle classes in emerging economies (especially China and
countries) India) and the very rich.
▪ Losers: The very poor (i.e.: Sub-Saharan Africa) and citizens of rich
countries (and former communist countries) with stagnating income.
• There's not a race to the bottom, but a problem still arises: what is the role of
trade?
• Trade has gains for winners and pains for losers.
Summary: According to trade theory, trade is benefitial and the gains to the winners more than offset the pains for
the losers. However, this does not pan out in practice and many countries struggle to scramble together policies to
minimize pains caused by trade (i.e.: US manufacturing job losses in NAFTA or China trade shock). Globalization is
international trade with competition. It has gains for winners and pains for losers, though overall it seems to be more
benefitial than hurtful. Globalization can be cultural, institutional, geographic or economic. There are 3 main
consequences of globalization:
1. Trade flows become global: small price differences matter a lot)
2. Relocation of firms: firms would relocate to access interesting markets (horizontal FDI) or lower costs (vertical
FDI)
3. Relocation of activities: trade causes competition to get fiercer and erode conditions (i.e.: salaries, environment,
etc…). Data does not seem to provide a clear cut. On the one hand, inequality is decreasing across countries. On
the other hand, inequality is increasing within countries.
All in all, globalization has gains for winners but also pains for losers, which are important to take into account in
economic policy.
FDI Page 3
, 1A - Meissner, 2014
September 10, 2022 5:42 PM
Title: Growth from globalization? A view from the very long run
Context
Is trade • Free international trade is traditionally seen as welfare enhancing and Pareto optimal.
traditionally
believed to foster Nevertheless, there has been a number of claims that it is not unambiguously
growth? beneficial.
• Theoretical and empirical work about the link between globalization & growth is
abundant (impact of integration of K, L markets and technology convergence).
How has integration
occurred throughout • Integration was high in the 19th century, fell in the interwar period, and then rose to
recent history?
new heights by the end of the 20th century.
What is (=WI) Theoretical Background
Globalization? • Globalization: economic and social connections between the world’s nations.
WI integration?
• Integration: degree of connection between two markets.
What are (=WR) some
common approaches to • Common approaches to measure globalization:
measure globaliz.? • Differentials in price of commodities: in commodity markets, the law of one
price dictates that through arbitrage, prices of homogenous commodities should
WI the law of one converge in the absence of trade barriers.
price (in commodity
markets)? ○ This is one way to measure globalization, though price changes not
necessarily mean more/less interconnectedness but might result from
Why (=Y) has it been other external shocks (i.e.: productivity).
used to measure
globalization? ○ Cons:
▪ Price differentials can result from preferences (elasticities of
What are (=WR) its substitutes) or technologies of arbitrage.
downsides? ▪ The studied markets must be connected for this to be relevant.
▪ 2 markets w/ identical technologies, endowments and preferences
will have identical prices irrespective of trade barriers.
WI the gravity model
of trade?
• Gravity model of trade: the larger the economies and the closer they are to each
other (geographically, institutionally, culturally, etc…), the more they will trade
WR its pros and with one another.
cons? ○ Pros: very useful measure of integration, as by solving for the trade
barriers allows one to infer trade costs as the scaled ratio of foreign trade
to domestic expenditure (when a value or an estimate of the elasticity of
substitution is available)
○ Cons: hard to distinguish the causes of trade (sometimes irrelevant when
just measuring degree of integration)
Why have
differentials in • Differentials in price and quantity of labor units (wages and employees,
prices and quantity
of labor units been migration): has also been used to measure integration of labor markets based on
used to measure the premise that they would converge as labor migrates to benefit from higher
globaliz.? wages.
Y have differentials
in interest rates • Differentials in interest rates: Capital flowed to where rents were higher (and so
been used to measure was the marginal product of capital), following the same pattern as migrants and
globaliz.? natural resources. Capital flows raised investment rates, allowing for higher real
incomes. These were however conditional on the quality of institutions and
overall financial development due to risking financial crises.
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