11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development Sugata Marjit Centre for Studies in Social Sciences Calcutta,

04/21/23 IGIDR, 2012

Finite Change – Implication for Trade Theory, Policy and Development

Sugata Marjit

Centre for Studies in Social Sciences Calcutta, India

Biswajit Mandal

Visva-Bharati University, Santiniketan, India

Prepared for Silver Jubilee Celebration Lecture at the IGIDR

04/21/23 IGIDR, 2012

Finite Change – Implication for Trade Theory, Policy and Development contd…

What is Finite Change in Trade Theory?

Why it is interesting and of non-trivial consequence?

Fundamental and Derived outcomes.

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Fundamental A Reinterpretation of the Factor Price Equalization

result of Samuelson.

Pattern of Specialization and Factor Price Equalization .

Why broader interpretation of HOS theorem may invalidate FPE result under ideal conditions.

Such assertion has close link with the idea of finite change.

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Jones (1974):

A small country with potential to produce many goods with two factors – capital (K) and labor (L).

As the endowment ratio of a country moves from a high to a low value, pattern of specialization changes.

May be through a process of growth, technical progress and accumulation of capital.

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K

1

2

3

O L

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1

2 and 1

3 and 2 2

3

O

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Consider n goods > m factor case in each country under autarky.

Identical technology etc except Endowments (HOS). No factor intensity reversal of any kind.

Post Trade: each country specializes in “m” goods.

But different sets of “m” goods.

FPE will not hold.

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Trade forces finite change.

Similarly trade in factors can enforce finite change.

Some literature: Ethier (1985), Jones and Marjit (1992), Choi and Marjit (1998),

Findaly and Jones (2000), Marjit and Kar (2005, 2011, 2012), Mandal and Marjit (2012) etc.

Dixit-Stiglitz-Krugman models usually “add” sectors through trade.

More recent – Melitz-Antras-Eaton-Kortum-Helpman etc. argue of productivity shift through exit of bad firms – not closure of activities as such.

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Jones and Marjit (1992) A closed economy environment where there are n industries and within each

industry there are varieties of goods.

Within an industry, there are variety of goods produced using labor and a common type of capital . Thus labor is mobile across industries and within an industry across varieties. Capital is specific to an industry but mobile across varieties within the industry. In a closed economy, positive demands for all goods guarantee positive output for all varieties.

Once we allow for trade: For each industry only one variety will survive or for one of the industries two varieties will survive and the rest will produce only one variety.

Large shocks to the system will lead to vanishing varieties. Thus we shall have either a pure specific factor model or a system where (n-1) sectors will have a specific factor structure and the residual a 2X2 HOS framework.

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Some interesting implications

Findlay-Jones (2000):

What does labor-saving technological progress do to wages?

Trade and labor economists differ, why?

They can agree if trade leads to finite change.

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Choi - Marjit (1998):

Tariff-Quota non-equivalence in competitive models

We may let 3 to shut down. But if we wish to protect 3 through a tariff or quota, the outcome may be drastically different – WHY?

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P

P*+t = Pd

P*

O B A Q

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Factor Movement :Marjit and Kar (2005, 2011, 2012)

Factor flows and wage-distribution

Which sectors survive as factors become internationally mobile.

Emigration and capital mobility

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Capital Mobility and Two-sided wage gap (South Vs North)

In South , in North . They may specialize in two different subsets

(X, Y) in South

(Y, Z) in North

rises in both countries.

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Argument is intricate in the sense that countries are otherwise similar

Critical point is that the mixed sector has to be labor-intensive, so that can actually raise in the North through viability of Z. In the south exactly opposite happens.

Finite change or large shocks (Jones, 2008) are induced by price changes that lead to closure of sectors/industries.

They may have completely different implications in general equilibrium from situation where we continue to be within the cone of diversification.

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Capital mobility and Corruption: Mandal and Marjit (2012)

Which sector(s) survive (s) as capital becomes internationally mobile.

If Z is “labor” intensive implying a low cost share of capital, the cost will exceed and Z will vanish. This is trivially true if

This is ensured if the following condition is satisfied

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Critical problems of growth is continuous adjustments needed to accommodate contracting and vanishing sectors. Comparison of two growth paths done only in terms of the rates is incomplete.

The idea of inclusive or exclusive growth is also related to the idea of finite change.

Jones (2004) we can not move resources so quickly from contracting to expanding sectors, people lose occupations.

Marjit and Kar (2011, OUP) on West Bengal and Maharashtra example. The Informal Sector in Gen.eqm. Does the trick.

Therefore in theory also, the issue of finite change should be far more important than local changes.

04/21/23 IGIDR, 2012

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Documents

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development Sugata Marjit Centre for Studies in Social Sciences Calcutta,