Essay: How trade increase welfare (Page 2 of 2)

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  • Subject area(s): Economics essays
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  • Published on: February 4, 2019
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When a factor is called specific it implies that it is immobile between sectors. In order to exemplify it, let’s say we have two industries, one of them produces leather bags and the other one produces strawberries. The machines being used in leather bag production are specific as they cannot be allocated to the strawberry industry. On the otherhand the strawberry fields, the sunshine or the agricultural devices can’t be moved to the leather bag industry either. The model however assumes that labour is mobile between the sectors, just like in the ricardian model. In addition, this model also assumes perfect competition and wages and prices are given. The PPF here is represented differetly, it is concave. The model assumes that the industries are aiming to maximise their profit, therefore they hire labour until the value of the last additional labour’s marginal productivity becomes equal to the wage to be paid. Specific factor model can be observed in the following example. If a country shifts to free trade, that might lead to the rise of a product eg. strawberries. Hence this sector becomes an exporter. In the beginning since wages are sticky in the short run, the recent increase in price will induce the industry to hire additional labour for the strawberry fields. In order to attract more labour, the strawberry producer must offer a higher wage. Hiring more labour they can produce more strawberries. In the same time, the leather bag industry is experiencing a reduction in their labour force, therefore they must increase the wage to keep their employees. In the strawberry industry as price and the labour increases, the value of the marginal product of capital has to increase, vis-à-vis the leather bag industry’s.

The Specific Factor Model, shows how trade increase welfare, and it is also highlights how income is diustributed between different sectors. In reality however, the Specific Factor Model is not the most accurate either, the Hecksher-Ohlin Model served to correct these imperfections.

Question 2

This part of the essay attempts to depict the role of japanaese trade policies behind the recovery and the miraculous rise of the country after World War II. After 1945, Japan losing their five biggest cities, consequently meant that they lost the 80 percent of the economy’s production capacity (Goto, 1990). Geographically Japan is very small and poor in natural resources, therefore in order to meet the demand for food and raw materials, Japan had to rely on high amount of imports (Mikio, 1994). In addition, in order to finance those imports requiring foreign exchange Japan to cover these needs increasing their exports. Due to Japan’s early Inclined Production Process plan, they were able to revive the coal and steel industry which allowed them to produce manufacturing products for export. It is true, that in the early phase of the recovery Japan imposed tariffs on both imports and exports, as they wanted to protect the domestic industries from competition, that cheap foreign prices could have caused. A good example is Japan’s imfamous car manufacturing, which has achieved a strong global recognition throughout the decades. After 1960, Japan announced an Income Doubling Plan, which contained an export expanding programme (Goto, 1990). However, in reality japanese prices were still higher than the foreign prices, which might have reduced the willingness to export. The government therefore set up incencentives that promoted export such as Pre-shipment export bill discount, tax system promoted exports. Furthemore the central bank kept the exchange rates low which further promoted trade. Thee measurment had a significant contribution in the rise of japanese companies such as Toyota to gain international recognition.

There is no single model which best describes and explains the events but the combination of two might help us to understand Japan’s trade policies. As we already know, the japanese agriculture were significantly less developed and less productive than Japan’s manufacturing. Therefore, the only product that Japan could realize on the international market were those goods, in which Japan was more productive in their production. When Japan enterred into the international market, the international manufacturing prices were still lower than the japanese. According to the Standard Trade Model, if a country’s exports are subsidized, while the country shifts their production to those products as a consequence of the increase in price, leading the Relative Supply rise and Relative Demand fall. Hence Japan’s Term of trade would decrease which results in a decline in welfare. Nevertheless, in Japan’s case we could see the opposite. The reason is, while Japan weas able to sell more and more manufacturing goods, which consequently led to an increasing economy of scale (Goto, 1990), meant the avarage cost of producing each unit decreased drastically. It is also important to note, that these evidences also correspond with the suggestion of the Specific Factor Model, which implies that trade could increase the welfare of a coutry. Nevertheless, there is also a change in how income is distributed among different industries.

In conclusion, in Japan’s case we could see how trade policy and thereby a shift to manufacturing resulted in welfare growth. However, it’s also important to note that the fast recovery not only the merits of the efficient trade policies, but is also connected to the strong civil service which bureaucratic apparatus helped execute Japan’s recovery plans.

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