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Download Lectures notes in international trade by Konya I. PDF

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By Konya I.

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But this is a contradiction, since profits are zero by the free-entry condition. Thus trade must lower prices and thus raise welfare. The reason is the presence of fixed costs: although trade will lower domestic sales x, x + x∗ rises and thus average cost falls. Without fixed costs trade would be neutral, since free entry would result in marginal cost pricing even without it. 2 Strategic trade policy We will look at a very simple model that captures the essence of the argument. Suppose there are two countries, each of which has two sectors.

This assumption is not essential, but it simplifies welfare analysis. There are two stages, in the first the government chooses whether to subsidize the oligopolistic firm and in the second the two companies compete. There is one factor, labor, and we choose units such that the unit labor requirement is one in both sectors, so that the wage rate equals unity. We solve the model by backward induction. Assume that the government chooses a per unit subsidy s. The first-order condition for the Home company is then xp + p = c − s.

The Ricardian example showed that there can be FPE without reproducing the IWE. We are interested in the IWE set, which for convenience we still call the FPE set, because there all the gains from integration can be exhausted through trade in goods. CHAPTER 8. EXTERNAL ECONOMIES OF SCALE 53 be an equilibrium with no FPE for the same parameter values. Again, see earlier example. HK has pictures, too. Sixth, there might be FPE in an equilibrium that does not reproduce the IWE: in our example no trade was an equilibrium with equal wages.

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