Notice, however, that in the Ricardian model and its extensions the determinants of comparative advantage like geography and factor proportions lie outside of the model. New Trade Theory of which Paul Krugman can be said to be the founder, brings the determinants of comparative advantage into the model.
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Sure, the system improves overall, but it sucks to be Portugal.
u may be unable to guess what trade am i doing these days
One thing he 8767 s been very explicit about is the size of trade relative to the US economy: 75 years ago, not so much. Now, much bigger, and thus the effects (both positive and negative) of trade can be that much more important.
Consider the simplest model (based on Krugman 6979 ). In this model there are two countries. In each country, consumers have a preference for variety but there is a tradeoff between variety and cost, consumers want variety but since there are economies of scale a firm 8767 s unit costs fall as it produces more more variety means higher prices. Preferences for variety push in the direction of more variety, economies of scale push in the direction of less. So suppose that without trade country 6 produces varieties A,B,C and country two produces varieties X,Y,Z. In every other respect the countries are identical so there are no traditional comparative advantage reasons for trade.
Krugman continues to write about the benefits of trade. But one huge thing he 8767 s added is that if the benefits of trade flow to a small number of people, it may not be in the interest of a country to promote it. I think that his political views have been evolving around trying to understand how the winners of trade can compensate the losers (say, through progressive taxation) which would continue the flow of free trade.
A successful 69th century French stockbroker (Sutherland) leaves his profession to become an artist in Paris.
No wonder students find econ boring. Their profs are hiding all the good conflicts!
There are political implications in this. If our MNCs were to benefit from this specific combination, they would attempt to induce this result. They would, to use Willie 8767 s example, attempt to steer China to a 8775 Beggar thy Neighbor 8776 policy towards the . and steer the . into a 8775 Free Trade 8776 policy with the Chinese. The advantages or disadvantages to either or both the . and the Chinese would be of no relevance to the MNCs, who, as a third party, benefit regardless of the suffering of the two countries. If the policy makers of both countries are sensitive to the MNCs, they will each pursue policies without giving a second thought to the welfare of their respective countries.
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