NEW and (OLD NEW) TRADE THEORIES · Paper and paperboard, articles of pulp, paper and board 290031...
Transcript of NEW and (OLD NEW) TRADE THEORIES · Paper and paperboard, articles of pulp, paper and board 290031...
INTERNATIONAL ECONOMIC POLICY AND
DEVELOPMENTAA 2019-2020
PROF. PIERLUIGI [email protected]
NEW and (OLD NEW) TRADE THEORIES
Why countries trade
Unit : US Dollar thousand
Va lue in 2 0 11 Va lue in 2 0 12 Va lue in 2 0 13
TOTAL All products 48779200 48354852 47442249
'87 Vehicles other than railway, tramway 6721872 7297720 6051037
'90 Optical, photo, technical, medical, etc apparatus 5828342 5858626 5996439
'84 Machinery, nuclear reactors, boilers, etc 6039220 5894851 5884932
'88 Aircraft, spacecraft, and parts thereof 5674397 5656078 5809280
'85 Electrical, electronic equipment 4441704 4176456 4265620
'30 Pharmaceutical products 2515682 2561810 2208824
'71 Pearls, precious stones, metals, coins, etc 1806466 1487383 1984524
'38 Miscellaneous chemical products 1503566 1458161 1580185
'99 Commodities not elsewhere specified 1448146 1389431 1360073
'29 Organic chemicals 1337973 1357339 1288524
'39 Plastics and artic les thereof 1308694 1196360 1188499
'27 Mineral fuels, oils, distillation products, etc 1350587 1054978 863414
'12 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes 352425 940514 812558
'08 Edible fruit, nuts, peel of c itrus fruit, melons 434239 466485 649739
'70 Glass and glassware 597946 540389 563711
'97 Works of art, collectors pieces and antiques 390647 363781 360520
'28
Inorganic chemicals, precious metal compound,
isotopes 565399 440523 343005
'73 Artic les of iron or steel 346606 343240 334642
'33 Essential oils, perfumes, cosmetics, toileteries 283269 314646 321851
'03 Fish, crustaceans, molluscs, aquatic invertebrates nes 289951 284451 314551
'74 Copper and artic les thereof 274593 305286 301160
'47 Pulp of wood, fibrous cellulosic material, waste etc 292599 309415 270139
'40 Rubber and artic les thereof 332220 285797 270080
'48
Paper and paperboard, artic les of pulp, paper and
board 290031 269107 267940
'22 Beverages, spirits and vinegar 181023 184968 259122
Produc t c ode Produc t la be lUnite d Sta te s of Ame ric a 's e xports to Ge rma ny
USA's main exports to Germany
USA's main imports from GermanyVa lue in 2 0 11 Va lue in 2 0 12 Va lue in 2 0 13
TOTAL All products 100392798 110602812 116924737
'87 Vehicles other than railway, tramway 25005279 29992279 33168142
'84 Machinery, nuclear reactors, boilers, etc 20696991 22469147 22374261
'30 Pharmaceutical products 8509406 10185517 11174901
'90 Optical, photo, technical, medical, etc apparatus 8865467 8926945 9036842
'85 Electrical, electronic equipment 7657145 7849851 7808184
'99 Commodities not elsewhere specified 3212837 3492118 3717551
'29 Organic chemicals 2921629 3137577 3444239
'88 Aircraft, spacecraft, and parts thereof 1570659 1523341 2973561
'39 Plastics and artic les thereof 2306547 2504781 2643734
'73 Artic les of iron or steel 1646913 2156193 1913667
'38 Miscellaneous chemical products 1328337 1463370 1707361
'71 Pearls, precious stones, metals, coins, etc 1414710 903251 1209582
'40 Rubber and artic les thereof 1128266 1202111 1200480
'28
Inorganic chemicals, precious metal compound,
isotopes 1340807 1293421 1097083
'72 Iron and steel 1300607 1265146 1078080
'48
Paper and paperboard, artic les of pulp, paper and
board 936960 915384 835700
'97 Works of art, collectors pieces and antiques 462857 853995 834437
'82 Tools, implements, cutlery, etc of base metal 649169 737781 815718
'94 Furniture, lighting, signs, prefabricated buildings 600225 599737 677175
'74 Copper and artic les thereof 675953 646996 626613
'76 Aluminium and artic les thereof 675225 663743 619956
'32 Tanning, dyeing extracts, tannins, derivs,pigments etc 517686 566919 598737
'70 Glass and glassware 537270 546710 542178
'22 Beverages, spirits and vinegar 555586 487750 468667
'83 Miscellaneous artic les of base metal 391987 440838 466874
Produc t c ode Produc t la be lUnite d Sta te s of Ame ric a 's imports from Ge rma ny
The Ricardian model and the H-O model explain why countries
trade but do not predict the simultaneous import and export of
the same product
In those models, markets were perfectly competitive and goods
are homogeneous:
• many small producers of identical product not able to
influence the market price
To explain trade of the same product, we need to change those
assumptions
Why do countries export and import the
same goods and/or services?
The New Trade TheoryNew trade theory (NTT) is a collection of economic models in international trade -developed in the late 1970s and early 1980s -which focuses on the role of increasingreturns to scale.
“Thirty years have passed since a small group of theorists began applying concepts
and tools from industrial organization to the analysis of international
trade. The new models of trade that emerged from that work didn’t supplant
traditional trade theory so much as supplement it, creating an integrated
view that made sense of aspects of world trade that had previously posed
major puzzles. The “new trade theory” – an unfortunate phrase, now quite
often referred to as “the old new trade theory” – also helped build a bridge
between the analysis of trade between countries and the location of production
within countries”.
THE INCREASING RETURNS REVOLUTION IN TRADE AND GEOGRAPHY, Prize Lecture, December 8, 2008, Paul Krugman
The New Trade Theory
2 key assumptions:
Imperfect competition: monopolistic competition, duopoly,
oligopoly, where producers are able to exert some control
over the market price.
Differentiated goods: goods are differentiated, differently
from perfectly competitive markets where the goods
produced are homogeneous (identical).
Monopolistic competition: introduction
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Monopolistic competition has two key features:
• The goods produced by different firms are differentiated
(hence firms are able to exert some control over the price).
• Firms enjoy increasing returns to scale, by which we mean
that the average costs for a firm fall as more output is
produced . By selling not only in the home market but also in
the foreign market firms can increase their returns to scale
– Note: increasing returns to scale create a reason for
trade to occur when the countries are similar in their
technologies and factor endowments
– Intra-industry trade deals with imports and exports in
different varieties of the same type of product (i.e. in the
same industry)
• The monopolistic competition model assumes differentiated products, many firms, and increasing returns to scale. Firms enter whenever there are profits to be earned, so profits are zero in the long-run equilibrium.
• When trade opens between two countries, the demand curve becomes more elastic, as consumers have more choices and become more price-sensitive.
• Firms then lower their prices in an attempt to capture consumers from their competitors and obtain profits. When all firms do so, however, some firms incur losses and are forced to leave the market.
• Additional gains from trade:
• (i) lower prices as firms expand their output and lower their average costs;
• (ii) more imported product varieties available to consumers.
• There are also short-run adjustment costs, such as unemployment, as some firms exit the market.
Conclusion: The assumption of differentiated goods allows to understand why countries often import and export varieties of the same type of good.
K e y T e r m Model of monopolistic competition: KEY POINTS
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
The first 2 assumptions are about the demand facing eachfirm:
Assumption 1: Each firm produces a good that is similar to but slightly differentiated from the goods that other firms in the industry produce.
• Each firm faces a downward-sloping demand curve for its product and has some control over the price it charges.
Trade under Monopolistic Competition
Assumptions of the model of monopolistic competition:
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Monopoly Equilibrium
FIGURE 6-1
Monopoly Equilibrium
The monopolist chooses
the profit-maximizing
quantity, QM, at which
marginal revenue equals
marginal cost.
From that quantity, we
trace up to the demand
curve and over to the
price axis to see that the
monopolist charges the
price PM.
The monopoly equilibrium
is at point A.
The extra revenue earned from
selling one more unit is called the
marginal revenue.
1 Basics of Imperfect Competition
Trade under Monopolistic Competition
Assumption 2: There are many firms in the industry
• If the number of firms is N, then D/N is the share of demand that each firm faces when the firms are all charging the same price.
• When only one firm lowers its price, however, it will face a flatter demand curve d.
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Demand with DuopolyFIGURE 6-2 (1 of 2)
Demand Curves with Duopoly
When there are two firms in
the market and they both
charge the same price, each
firm faces the demand curve
D/2.
At the price P1, the industry
produces Q1 at point A
and each firm produces Q2 =
Q1/2 at point B.
If both firms produce identical
products and one firm lowers
its price to P2, all consumers
will buy from that firm only;
the firm that lowers its price
will face the demand curve, D,
and sell Q3 at point C.
1 Basics of Imperfect Competition
Demand with DuopolyFIGURE 6-2 (2 of 2)
Demand Curves with Duopoly
Alternatively, if the products
are differentiated, the firm that
lowers its price will take
some, but not all, sales from
the other firm;
it will face the demand curve,
d, and at P2 it will sell Q4 at
point C′.
1 Basics of Imperfect Competition
The 3th assumption is about each firm’s cost structure
Assumption 3: Firms produce using a technology with increasing returns to scale.
FIGURE 6-3
Increasing Returns to
Scale This diagram
shows the average
cost, AC, and marginal
cost, MC, of a firm.
Increasing returns to
scale cause average
costs to fall as the
quantity produced
increases.
Marginal cost is below
average cost and is
drawn as constant for
simplicity.
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Numerical Example of Increasing Returns to ScaleTABLE 6-2
Cost Information for the Firm This table illustrates increasing returns to
scale, in which average costs fall as quantity rises.
Trade under Monopolistic Competition
Whenever the price charged is above average costs, then a firm
earns monopoly profits.
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
The 4th assumption is about profit:
Assumption 4: Because firms can enter and exit the industry freely, monopoly profits are zero in the long run.
• Firms will enter as long as it is possible to make monopoly profits, and the more firms that enter, the lower profits per firm become.
• Profits for each firm end up as zero in the long run, just as in perfect competition.
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Trade under Monopolistic Competition
Next, we will examine monopolistic competition:
• in the short run
• in the long run
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
without trade
• in the short run
• in the long run with free trade
Short-Run Equilibrium
Equilibrium without Trade
FIGURE 6-4
Short-Run Monopolistic
Competition Equilibrium
without Trade The short-
run equilibrium under
monopolistic competition
is the same as a monopoly
equilibrium.
The firm chooses to
produce the quantity Q0 at
which the firm’s marginal
revenue, mr0, equals its
marginal cost, MC.
The price charged is P0.
Because price exceeds
average cost, the firm
makes monopoly profits.
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Long-Run Equilibrium
Equilibrium without Trade
FIGURE 6-5 (1 of 2)
Long-Run Monopolistic Competition
Equilibrium without Trade
Drawn by the possibility of making
profits in the short-run equilibrium,
new firms enter the industry (drawing
demand away from existing firms and
producing more product varieties)
and the firm’s demand curve, d0,
shifts to the left and becomes more
elastic (i.e., flatter), shown by d1.
The long-run equilibrium under
monopolistic competition occurs at
the quantity Q1 where the marginal
revenue curve, mr1 (associated with
demand curve d1), equals marginal
cost.
At that quantity, the no-trade price,
PA, equals average costs at point A.
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Long-Run Equilibrium
Equilibrium without Trade
FIGURE 6-5 (2 of 2)Long-Run Monopolistic
Competition Equilibrium without
Trade
In the long-run equilibrium, firms
earn zero monopoly profits and
there is no entry or exit.
The quantity produced by each firm
is less than in short-run
equilibrium. Q1 is less than Q0
because new firms have entered
the industry.
With a greater number of firms and
hence more varieties available to
consumers, the demand for each
variety d1 is less then d0. The
demand curve D/NA shows the no-
trade demand when all firms
charge the same price.
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Firm’s demand curve in the long-run (flatter than d0)(quantity demanded depending on the price charged by that firm)
Short-Run Equilibrium with Trade
Equilibrium with Free Trade
Trade under Monopolistic Competition
Assume Home and Foreign are exactly the same.
• Same number of consumers
• Same technology and cost curves
• Same factor endowments
• Same number of firms in the no-trade equilibrium
Given the above conditions, if there are economies of scale, there is reason for trade. Even two identical countries will engage in trade because increasing returns to scale exist.
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Short-Run Equilibrium with Trade
Equilibrium with Free Trade
Trade under Monopolistic Competition
• The number of firms in the no-trade equilibrium in each country is NA.
• When trade opens, the number of customers available to each firm doubles as does the number of firms
• Since there are twice as many consumers, but also twice as many firms, the demand curve is the same (2D/2NA=D/NA)).
• The product varieties also double.
• With the greater number of varieties available, the demand for each individual variety will be more elastic.
• If one firm drops its price below PA, it can attract a greaternumber of (Home and Foreign) customers away from otherfirms
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Short-Run Equilibrium with Trade
Equilibrium with Free Trade
FIGURE 6-6 (1 of 2)
Short-Run Monopolistic
Competition Equilibrium with
Trade
When trade is opened, the
larger market makes the firm’s
demand curve more elastic, as
shown by d2 (with
corresponding marginal
revenue curve, mr2).
The firm chooses to produce
the quantity Q2 at which
marginal revenue equals
marginal costs;
this quantity corresponds to a
price of P2 (point B). With sales
of Q2 at price P2, the firm will
make monopoly profits
because price is greater than
AC.
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Short-Run Equilibrium with Trade
Equilibrium with Free Trade
FIGURE 6-6 (2 of 2)
Short-Run Monopolistic
Competition Equilibrium with
Trade
When all firms lower their
prices to P2, however, the
relevant demand curve is D/NA,
which indicates that they can
sell only Q′2 at price P2.
At this short-run equilibrium
(point B′), price is less than
average cost and all firms incur
losses.
As a result, some firms are
forced to exit the industry.
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Long-Run Equilibrium with Trade
Equilibrium with Free Trade
Trade under Monopolistic Competition
• Since firms are making losses, some of them will exit the industry.
• Firm exit will increase demand for the remaining firms’ products and decrease the available product varieties to consumers.
• We now have NT firms which is fewer than the NA firms we had before.
• The new demand D/NT >D/NA (because the reduction of firms increases the share of demand facing each one)
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
FIGURE 6-7 (1 of 2)
Long-Run Monopolistic
Competition Equilibrium with
Trade
The long-run equilibrium with
trade occurs at point C.
At this point, profits are
maximized for each firm
producing Q3 (which satisfies
mr3 = MC) and charging price PW
(which equals AC).
Since monopoly profits are zero
when price equals average cost,
no firms enter or exit the
industry.
Long-Run Equilibrium with Trade
Equilibrium with Free Trade
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
FIGURE 6-7 (2 of 2)
Long-Run Monopolistic
Competition Equilibrium with
Trade (continued)
Compared with the long-run
equilibrium without trade, d3 has
shifted out as domestic firms
exited the industry and has
become more elastic due to the
greater total number of varieties
with trade..
Compared with the long-run
equilibrium without trade at
point A, the trade equilibrium at
point C has a lower price and
higher sales by all surviving
firms.
Long-Run Equilibrium with Trade
Equilibrium with Free Trade
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Gains from Trade
Equilibrium with Free Trade
The long-run equilibrium at point C has two sources of gains from trade for consumers:
1. A drop in price:
The lower price is a result of increased productivity of the surviving firms coming from increasing returns to scale.
2. Gains from trade to consumers:
Although there are fewer product varieties made within each country (by fewer firms), consumers have more product variety because they can choose products of the firms from both countries after trade.
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Equilibrium with Free Trade
Adjustment Costs from Trade
• There are adjustment costs associated with monopolistic competition, as some firms shut down or exit the industry.
• Workers in those firms experience a spell of unemployment.
• Over the long run, however, we could expect those workers to find new jobs, so these costs are temporary.
Trade under Monopolistic Competition
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Conclusions of the model
• When firms have differentiated products and increasing returns to scale, there is a potential for gains from trade that did not exist in earlier models.
• The model of monopolistic competition shows that trade will occur between countries even if these countries are identical.
• There is trade within the same industries across countries because there is a potential to sell in a larger market.
• This will induce firms to lower their prices below those charged in the absence of trade.
• As firms exit, remaining firms increase their output and average cost falls. Lower costs results in lower prices for consumers in the importing country.
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Conclusions-2
• Lower prices and higher product variety are the gains from trade under monopolistic competition.
• However, since some firms exit the market, there are short-run adjustment costs due to worker displacement.
Book: Feenstra/Taylor, 2011 , International Trade,Worth Publishers
Why countries trade
A brief introduction to the New New trade theory:firms in international trade (or heterogeneous firms)
Firms in international trade
• Under Ricardian Model and H-O Model firms are blackboxes
• Under New trade theories: firms' dimension counts with increasing return to
scale, but all domestic firms will export afteropening up to trade;
there is a firm-exit effect, but it is indeterminatewhich firms exit the market
• Micro-level empirical evidence (see the many papersby Bernard, et al. starting in the mid-90s) show stylizedfacts unexplained under these theories
Firms in international trade -2
• Firms are very different in terms of productivity
• Only a minority of firms are exporters
• Usually exporters are more productive
• Exporting is characterized by fixed costs
What effects on gains from trade?
• Opening up to trade kicks out the least productive firms and enhances average productivity.
Hence, need a framework that could account for firms‘ heterogeneity
The “New” new trade theory
This framework is called the “New” new trade theory (or the theoryof heterogeneous firms)• Melitz (2003) constructed a model in which only a few highly
productive firms are engaged in export: these firms are able to make sufficient profits to cover the
large fixed costs required for export operations.
• Helpman et al. (2004) expanded the Melitz (2003) model intoone in which the productivity of exporting firms is lower thanthat of firms engaged in local production overseas (FDI). only productive firms can cover the enormous fixed costs
(local factory construction, etc.) entailed in local productionoverseas.
These "Melitz-type models" constituted the theoretical foundationsfor empirical research based in particular on firm-level data.
The “New” new trade theory -2
New source of trade gains:
• When lowered trade barriers stimulate competition on aglobal scale, low-productivity firms that had been protectedare forced to withdraw from the market, replaced by theincreased production volume of high-productivity firms.
• As a consequence, the average productivity of a country onthe whole rises. This rise in average productivity means a risein people's real income; people become wealthier throughthe natural selection of firms on a global scale.