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May 17, 2007

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spencer

I have no trouble following the discussions about trade if the country's trade is in rough balance. But how does it impact the arguments and gains or loses when the country run a large and significant trade deficit as the US is doing? Excluding the impact through the interest rate side of the model does the fact that the import side is much larger then the export side change the cost-benefit calculations?

Brad DeLong

Aha. Price effects as an add-on to gains-from-trade is clearly a non-starter...

Somebody else, somewhere, suggested a model in which increased trade decreased local market power, and in a model with menu costs led to decreased inflation. But I'm not sure it was coherent...

Brad

Justin Rietz

What about the differences between the short run and the medium / long run? Is there any disagreement that in the long run opening up markets to free trade is beneficial to all parties?

In the short run, there is an increase in domestic unemployment and a decrease in wage levels caused by lower priced imports. However, the new markets for exports creates an increase in demand for exported goods, causing the domestic prices of these goods to increase. Businesses in the exporting industries, faced with lower wage levels and higher prices for their goods, hire more workers and increase production - basic MR = MC equilibrium. Moreover, lower wage levels will also entice businesses not directly involved in trade to hire more workers and expand production.

The result: wage levels bounce back, the domestic price of exported goods drops, and general production increases (with the possible result of an across the board increase in consumer purchasing power).

Obviously this takes some time to occur. Therefore, the trade policy that would follow from this would be: continue to open up markets to free trade and provide short-term support (unemployment benefits, retraining stipends) for workers impacted directly by cheaper imports. We can consider the costs of these short term safety net measures as "punishment" for having protectionist policies in the first place. Eventually, all markets (domestic) will be open to free trade and we won't have anything to blog about ;-)

DRR

I'm confused.

I don't know if it can "override" dsitributional issues. My guess is for someone who lost their job to overseas competition, cheaper consumer goods don't make up for their loss of welfare, that being said, the change in the relative price of imports as a result of free trade (for the rest of us), IS an "add on" to the separate comparative advantage restructuring benefits of liberalization, is it not?

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