Английский язык экономика. Учебно-методическое пособие по научно-техническому переводу, аннотированию и реферированию

Table 9 shows that half of world trade is trade between the rich industrial countries, and only 14 % of trade does not involve these countries at all. World trade and world income are organised around the rich industrial countries.

Services are around 70 % of GDP in rich countries, but a much smaller share of their trade. Trade in goods (merchandise trade) remains important because many countries import goods, add a little value, and then re-ex- port them. The value added makes a small contribution to GDP but gross flows of imports and exports of goods are large.

Table 9

Trade patterns, 2000 (% of world exports)

Destination country Origin country

Rich Others

Table 10 distinguishes between primary products (agricultural commodities, minerals, and fuels) and manufactured commodities. Although the EU is chiefly an exporter of manufactures, primary commodities account for one-fifth of exports. And although the EU has to import many raw materials, imports of wholly or partly finished manufactures account for three-quarters of EU imports. US trade exhibits the same general pattern.

Having discussed trade patterns, we now examine the reasons why trade takes place at all.

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Text 2. Gains from Trade

Comparative advantage

Trade is mutually beneficial when there are cross-country differences in the relative cost of making goods.

The law of comparative advantage says that countries specialise in producing and exporting the goods that they produce at a lower relative cost than other countries.

One reason why relative costs may differ is differences in technology across countries. Suppose labour is the only production and there are constant returns to scale. Table 11 assumes that it takes 30 hours of American labour to make a car and 5 hours to make a shirt. UK labour is less productive. It takes 60 hours of UK labour to make a car and 6 hours to make a shirt.

Suppose US workers earn $6 an hour, and British workers £2 an hour. Tab. 11 shows the unit labour requirement (ULR) or hours of work to make a unit of each good. US labour is absolutely more productive than UK labour in making either good. However, US labour is relatively more productive in cars than in shirts. UK labour takes twice as long to make a car, but only 6/5 as long as US labour to make a shirt. Different relative productivity makes trade mutually beneficial.

The opportunity cost ОС of making a unit of one good is the quantity of the other good that must be given up to create the extra production resources. Tab. 11 shows these opportunity costs ОС in each country prior to trade. Because of different relative productivity, the opportunity cost of a car is 6 shirts in the US but 10 shirts in the UK, whereas the opportunity cost of a shirt is 1/6 of a car in the US but only 1/10 of a car in the UK.

If the UK makes 60 more shirts, giving up 6 cars, the US makes these 6 cars for the loss of only 36 shirts. International trade and specialisation let the world economy have 24 more shirts with no loss of cars. Similarly, if the

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US makes 10 more cars, giving up 60 shirts, the UK makes these extra shirts for the loss of only 6 cars, giving the world 4 more cars but no fewer shirts.

The gains from trade are additional output of some goods with no loss of other goods.

The market also gets the world economy to the right answer. Tab. also shows the unit labour cost ULC of making each good. We assume that the hourly wage is $6 in the US and £2 in the UK. If labour is the only input, the unit labour cost is the average total cost of a good, and the price for which it is sold in a competitive market.

Since the US and UK use different currencies, a foreign exchange market is set up and an equilibrium exchange rate established. Suppose the $/£ exchange rate is high. This makes all UK goods, initially produced in pounds, cost a lot of dollars. The UK is uncompetitive in both goods. Now consider lower and lower values of $/£. When the exchange rate is low enough, the UK can compete by exporting one good. Which one? The one it is relatively better at making.

For example, in Table 2-1 if the exchange rate is $2/£, then UK cars can be sold for $240 and UK shirts for £24. The UK can undercut the US in shirts but not in cars. Similarly, US cars sell for £90 and US shirts for £15. Again, the UK is competitive in shirts but not in cars.

This is why absolute advantage is unimportant. The single exchange rate can adjust to make any country’s goods competitive on average. But which goods it then imports, and which it then exports, depends on which it makes relatively better or worse than average, which is precisely what the Law of Comparative Advantage promises us.

The Law has many applications in everyday life. Suppose two students share a flat. One is faster both at making the dinner and at vacuuming the carpet. If tasks are allocated according to absolute advantage, one student does nothing. The jobs get done faster if each student does the task at which he or she is relatively faster.

Relative factor abundance

One country can eventually learn another country’s technology. Technology differences are probably not the main explanation for comparative advantage. The main reason that a country has a relatively low price for a particular output is that it has a relatively low price for the inputs which that output uses. In turn, relatively low input prices are largely explained by having relatively abundant quantities of those inputs available.

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If the UK is relatively generously supplied with human capital, it should export university places to foreign students from the Caribbean. If the Caribbean is relatively well endowed with tropical land, it exports bananas and nutmeg to the UK. Differences in relative factor supply are a vital reason for comparative advantage and the pattern of international trade.

Fig. 16 displays evidence confirming this analysis. Countries with scarce land but abundant skills have high shares of manufactures in their exports; countries with lots of land but few skills typically export raw materials. As well as dots for individual countries, the figure also shows that the explanation works for groups of countries, represented by diamond shapes.

Fig. 16. Relative factor abundance and export composition

Source: World Bank, World Development Report, 2005

Thus, comparative advantage reflects initial differences in relative production costs, arising from differences in technology or in relative factor abundance.

Two-way trade

Different relative factor abundance explains why OPEC exports oil and China exports labour intensive goods from toys to trainers. But this approach cannot explain why the UK exports cars (Rover, Jaguar, MG) to Germany but also imports cars (Mercedes, BMW, VW) from Germany. The UK cannot simultaneously be scarce and abundant in the inputs used to make cars.

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Intra-industry trade is two-way trade in goods made by the same industry.

Two-way trade within the same industry occurs where consumers like a wide choice of brands that are similar but not identical. A Jaguar is not quite a Mercedes, nor is Danish Carlsberg identical to Belgian Stella. Consumers like variety.

However, we also need economies of scale. Instead of each country trying to make small quantities of each brand in each industry, the UK makes Jaguars, Germany makes Mercedes and Sweden makes Volvos, then we swap them around through international trade. We all benefit from low cost and greater variety.

Text 3. Winners and Losers

Table 11 in Text 2 confirms that exploiting initial differences in relative costs allows gains from trade. The world gets more output from any given inputs. Similarly, intra-industry trade offers variety and cost reduction through scale economies. But this does not imply that everybody gains. Here are two examples of how some people can lose.

Refrigeration

The invention of refrigeration let Argentina supply frozen meat to the world market. Its meat exports, nonexistent in 1900, were 400 000 tons a year by 1913. The US, with exports of 150000 tons in 1900, had virtually stopped exporting beef by 1913.

Who gained and who lost? Argentinian cattle grazers and meat exporters attracted resources. Owners of cattle and land gained; other land users lost out because, with higher demand, land rents increased. Argentine consumers found their steaks got dearer as meat was shipped abroad. Argentina’s GNP rose a lot, but the benefits of trade were not equally distributed. Some people in Argentina were worse off. In Europe and the US, cheaper beef made consumers better off. But beef producers lost out because beef prices fell.

As a whole, the world gained. In principle, the gainers could have compensated the losers and still had something left over. In practice, gainers rarely compensate losers. Some people lost out.

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The UK car industry

As recently as 1971, UK imports of cars were only 15 % of the domestic UK market, while 35 % of UK car output was exported. The UK was a net exporter of cars. Imports are now over 60 per cent of the UK market; however, exports recovered in the 1990s as Nissan, Honda and Toyota established UK plants to produce for the EU market.

UK car buyers and foreign producers like VW benefited from the rise in UK imports of cheaper foreign cars. But UK car producers like Rover had a tough time. UK governments faced repeated pressure to protect UK car producers from foreign competition. Restricting imports would help domestic producers but hurt domestic consumers by raising prices to UK car buyers.

Should the government please producers or consumers? More generally, how should we decide whether to restrict imports or have free trade in all goods? In analysing the costs and benefits of tariffs or other trade restrictions, we move from positive economics, why trade exists and what form it takes, to normative economics, what trade policy the government should adopt.

Trade policy operates through import tariffs, export subsidies and direct quotas on imports and exports.

Text 4. The Economics of Tariffs

An import tariff is a tax on imports.

If t is the tariff, the domestic price of imported goods is (1 + t) times the world price of the imported good. By raising the domestic price of imports, a tariff helps domestic producers but hurts domestic consumers.

Fig. 17. The effect of a tariff

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Figure 16 shows the domestic market for cars. Suppose the UK faces a given world price, £10000 per car, shown by the solid horizontal line. Schedules DD and SS are the domestic demand for cars and supply of cars. Suppose brands do not matter. Domestic and foreign cars are then perfect substitutes.

At a price of £10 000, UK consumers wish to purchase Qd cars, at point G on their demand curve. Domestic firms want to make Qs cars at this price. CG shows imports, the gap between domestic supply Qs and domestic demand Qd..

The effect of a tariff

With a 20 % tariff on imported cars, car importers must charge £12 000 to cover their costs inclusive of the tariff.

The broken horizontal line at this price shows that importers are willing to sell any number of cars in the domestic market at a price of £12 000. The tariff raises the domestic tariff-inclusive price above the world price.

By raising domestic car prices, the tariff boosts domestic car production from Qs to Qs’ and offers some protection to domestic producers. In moving up the supply curve from С to E, domestic producers with marginal costs between £10000 and £12000 can now survive because the domestic price of imports has been raised by the tariff.

The higher price also moves consumers up their demand curve from G to F. The quantity of cars demanded falls from Qd to Qd’. From the consumers’ viewpoint, the tariff is like a tax. Consumers pay more for cars.

Imports fall from CG to EF both because domestic production rises and because domestic consumption falls. The flatter are the domestic supply and demand schedules, the more a given tariff reduces imports. If both schedules are steep, the tariff-induced rise in the domestic price has much less effect on the quantity of imports.

Costs and benefi ts of a tariff

We need to distinguish net costs to society from transfers between one part of the economy and another. After the tariff, consumers buy Qd, which costs them (£2000 × Qd) more than buying this quantity at the world price. Who gets these extra payments, the area LFHJ in Fig. 17?

Some goes to the government, whose revenue from the tariff is the rectangle EIHF, the tariff of £2000 × (Qd’ – Qs’) imported cars. This transfer

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EIHF from consumers to the government is not a net cost to society. The government may use the tariff revenue to reduce income tax rates.

Some of higher consumer payments go to firms as extra profits. The supply curve shows how much firms need to cover production costs. Hence the area ECJL is the rise in firms’ profits, extra revenue from higher prices over and above extra production costs. Thus ECJL is transferred from consumers to the profits of firms, but not a net cost to society as a whole.

The shaded area A is part of the extra consumer payments LFHJ going neither to firms as extra profit nor to government as tariff revenue. It is a net cost to society: the cost of supporting inefficient domestic firms.

Society could import cars from the rest of the world in unlimited quantities at the world price of £10000, which is the true marginal cost of cars to the domestic economy. The triangle A is the resources society wastes by producing (Qs’ - Qs) domestically when it could have been imported at a lower cost. The resources drawn into domestic car production could be used more efficiently elsewhere in the economy, including its export sectors.

There is another net loss to society, the triangle B. If the tariff was abolished, the quantity of cars demanded would rise Qd.. The triangle В is the excess of consumer benefits, as measured by the height of the demand curve showing how much consumers want the last unit demanded, over the marginal costs of expanding from Qd’ to Qd, the world price at which imports could be purchased. The triangle В shows the net benefit society has lost by consuming too few cars.

To sum up, a tariff leads to a rise in the domestic price, inducing both transfers and pure waste. Money is transferred from consumers to the government and to producers. As a first approximation, the net cost of these transfers to society as a whole is zero, though there are distributional implications. Some individuals win while others lose.

In addition, a tariff involves pure waste, since post-tariff prices exceed the true marginal cost of cars to society, which remains the world price. Hence, consumers buy too few cars, and domestic producers make too many cars. Since zero tariffs avoid this waste, this is the case for free trade.

Should a tariff ever be adopted? Tab. 12 lists some of the common arguments for tariffs. The fi rst-best argument is a case where a tariff is the best way to achieve a given objective. Second-best arguments are cases where the policy is beneficial but another policy that would be even better. Non-arguments are partly or completely fallacious.

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Table 12

(Example) Arguments for tariffs

The optimal tariff: the fi rst-best argument

The case for free trade requires that an economy’s imports have no effect on the world price. For a small economy this is correct. However, a large country may affect the world price of its imports. For society, the marginal cost of the last unit of imports then exceeds the world price. Another import bids up the world price that all other importers must pay, but each small importer in the big country ignores any effect of their actions on world prices. Under free trade the country imports too much.

For the country as a whole, the marginal cost of imports exceeds the price paid by individual importers. A tariff puts this effect back into the price, inducing individual importers to act in the way that is best for society.

When a country affects the price of its imports, the optimal-tariff makes individual importers take account of their effect on the price that other importers must pay.

Second-best arguments for tariffs

The principle of targeting says that the best way to meet an aim is to use a policy that affects the activity directly. Policies with side effects are second-best because they distort other activities.

The optimal tariff is an application of the principle of targeting. When the problem lies in the market for imports, a tariff on imports is the most efficient solution. Now we turn to second-best arguments for tariffs where the original problem is not directly to do with trade.

The principle of targeting tells us that there are other ways to solve these problems at a lower net social cost.

Suppose society wishes to help inefficient farmers or craft industries to preserve the old way of life. Tariffs protect these producers from foreign competition but also hurt domestic consumers through higher prices. A production subsidy would still keep farmers in business but, by tackling the problem directly, would not hurt consumers. In Fig. 1, the cost of tri-

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angle A must be incurred to prop up domestic producers so they can make Qs’not Qs. But a tariff unnecessarily incurs the cost of triangle В as well.

Some poor countries dislike their few rich citizens enjoying luxury yachts when society needs its resources to stop people starving. To suppress luxury consumption, a consumption tax is best. Of course, it incurs triangle В in Fig. 17 since domestic prices rise to consumers, but it avoids triangle A. A tariff on yachts also reduces consumption, but higher domestic prices then provide an incentive for inefficient domestic firms to make yachts, incurring triangle A as well.

In case there is a future war, some countries want to preserve their defence capability by protecting domestic industries making food or jet fighters. Again, a production subsidy not an import tariff is the best way to meet this objective.

A common argument for tariffs is to let infant industries get started. With initial protection, they learn the business and can eventually meet foreign competitors on equal terms. But if the industry is such a good idea in the long run, why cannot private firms borrow the money to see them through the early period until they can compete? If the problem lies in bank lending to small firms, the principle of targeting says that a better policy is to solve the banking problem directly. Failing this, a production subsidy in the early years is still better than a tariff, which also penalises consumers. And the worst outcome is the imposition of a permanent tariff, which lets the industry remain inefficient long after it is supposed to have mastered its trade.

In the eighteenth century, most tax revenue came from tariffs, which were administratively easy to collect. This remains in some developing countries. But modern economies can raise taxes through many channels. Administrative simplicity is no longer a pressing concern.

Fallacious arguments for tariffs

Domestic firms often complain about cheap foreign labour. However, the whole point of trade is to exploit international differences in the relative prices of different goods. If the domestic economy is relatively well endowed with capital, it benefits from trade because its exports of capi- tal-intensive goods let it buy labour-intensive goods more cheaply from abroad than it could make them at home.

Over time, countries’ comparative advantage evolves. Nineteenth-cen- tury Britain exported Lancashire textiles all over the world. But textile

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