Trade Problem Set 60 2-2




1. At the WTO Ministerial meetings in Seattle in 1999, opponents of the WTO argued that freer trade causes harm to many people in the country. Supporters of the WTO, however, argued that freer trade generates benefits for many people in the country. As our trade models suggest both sides are probably right. Show why this result is suggested in a Heckscher-Ohlin model by evaluating the redistributive effects of the following types of trade policies. Assume there are two goods, clothing and steel, produced with two factors, labor and capital. Suppose the country is capital-abundant and steel production is capital-intensive. Write down the magnification effect for prices when the country implements each of the following policies. Also specify who wins and who loses as a result of the policy. (Let PS and PC be the price of steel and clothing; let w and r be the wage rate and rental rates). [Hint: If a policy affects an import price, for example, assume the export good price remains unchanged]

  Magnification Effect Winners Losers
A. an import tariff      
B. an export tax      
C. an export subsidy      

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Last Updated on 11/9/02