Posts Tagged ‘opportunity’

free at last, free at last, free (trade) at last

October 15, 2008

economists favor free trade

key takeaways:

the more different you are the more you can benefit (from trade)

lower opportunity cost is a relative advantage

distribution (split) matters

key terms:

free (old) trade theory – free trade benefits everyone. even if you are the best at everything (not intuitive). this means that even if i am absolutely better at everything you are relatively better than me at something. this is your comparative advantage. ricardo, came up with this theory, which is controversial over 200 years ago. opportunity cost is a fundamental assumption or residue of this model.

e.g. china is relatively better than the US at producing apparel than chemicals.

free trade creates a more efficient allocation of resources

new trade theory – it might be effective for a nation to shelter infant industries until they had grown to a sufficient size large enough to compete internationally. Paul Krugman (a neo-Keynesian economist) just got a noble on this. Here is his blog, he now writes for the NY Times. he showed how increasing returns could imply a possible role for welfare-improving protectionism. Krugman (1991) (JSTOR and here) brings increasing returns together with capital and labor migration and transport costs into one model.  Krugman’s (1991) model has become a workhorse of economic geography and international trade.

other key consequences of new trade theory:

  • if trade is possible it is welfare enhancing
  • Preferences for variety push in the direction of more variety, economies of scale push in the direction of less.
  • The number of world varieties will decrease even as the number of varieties available to each consumer increases. Increasing variety for individuals even as world variety declines is a fundamental fact of globalization.  In the context of culture, Tyler explains this very well in his book, Creative Destruction; when people in Beijing can eat at McDonald’s and people in American can eat at great Chinese restaurants the world looks increasingly similar even as each world resident experiences an increase in variety.

issue: how is ‘better off’ distributed. may need to re-allocate to transfer resources


crucial for fairness

welfare create can create incentives for growth, which is crucial for the robustness of model