Monday, April 30, 2007

Winners and Losers in International Trade Theory

No "globalisation" based blog would be complete without a comment on the recent Rodrik-Mankiw-Krugman "love in" on basic international trade theory and the costs of adjustment (also my PhD topic many years ago).

It is useful for Rodrik to highlight this issue.

There is a distinct difference between how globalisation is perceived by economists and "the man in the street" revolving around how big the pie is becoming and whether we all get bigger slices or whether some people's slices are becoming a lot smaller. The assumption that those with bigger pieces of pie give a little back to the man with the smaller piece was always a weak assumption. The real question is how upset and angry the people with the small pieces become (and how much lobby strength they have).

Economists tend to feel that they have to defend free trade in the light of the "anti-globalisation" brigade (Wolf/Bhagwati etc.).

In a sense, this weblog acts to highlight one potential market failure - that of the environment (touched on by the Rodrik post).

The globalisation and environmental debate is similar with economists arguing that free trade is good for the environment. Of course, this is equivalent to the larger pie argument - in reality there will be environmental winners and losers. The existence of cross-boundary pollution and possible global warming effects may mean however that the winners do not remain so for very long.

The kicking off of this debate is good timing for the launch of Rodik's new weblog HERE.

I was going to rehash some of the posts on this blog but instead I refer the reader to the Economist's View article that does an excellent job of bringing all the parties together including all the various updates. I include just the summary.

An article for all undergraduate and postgraduate students to read. Teaching international trade was always fun even if I did have to remind myself of the difference between all the theorems every year.

The summary below highlights why the future of economics is empirical :-)

On the Other Hand . . . . Rodrik versus Mankiw (Others Also Weigh In)
Trade and Prices: An Attempted Summary. Can we all agree on these?

1. Trade policy works through its effect on the relative prices of goods, not through the price level.
2. Depending on what side of the change in relative prices they find themselves, any specific group of consumers or producers can be made worse off by a move to free trade.
3. A corollary: there is no guarantee that free trade raises real wages.
4. The Carlos Diaz-Alejandro rule: For almost any particular conclusion you want to arrive at, there is some economic model that will take you there.
5. Throw in some scale economies (dynamic or otherwise), and then just about anything can happen (including free trade making some countries worse off).
6. The positive spin: This does not diminish the value of economic modeling; it simply means we have to be more careful with generalizations and be more explicit about the assumptions that lie behind our reasoning.
7. Bottom line: It is possible to have an illuminating (sometimes), intelligent (mostly), and entertaining (almost always) economic debate in the blogosphere.

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