POLS1005 Lecture Notes - Lecture 7: Human Capital, Free Trade, Protectionism
[Lecture 7]
THE POLITICS OF TRADE AND FINANCE
THE INTERACTION OF POLITICS AND ECONOMICS
Differences between economics and politics:
• Economics and politics are two ways of allocating scarce resources (Kindleburger 1970: 5)
- Economics uses a market
- Politics uses a budget
• Economics focuses on the creation and distribution of wealth
- - Definition: “Wealth is anything (capital, land, or labor) that can generate future
income; it is composed of physical assets and human capital (including embodied
knowledge).” (Gilpin 1975: 227)
• Political science focuses on power
- Definition: “[M]an’s control over the minds and actions of other men”
Morganthau (1945:26)
• Power can take many forms (military, economic, or psychological), but it is fundamentally
about force
Actors:
• What new types of actors are relevant?
- Producers
- Importers
- Exporters
- Consumers
• Theoretically, trade benefits both sides
- Producers can sell to new markets, expand business & increase efficiency
- Consumers get less expensive goods
The Political Economy of Trade:
• Producers have concentrated interests in protecting their business and receive significant
benefits from protection (e.g. profits, jobs)
• Consumers have diffuse interests (e.g. lower prices) in free trade
Factors of production:
• Land: farming or natural resources
• Labor: skilled or unskilled
• Capital: human or financial
WHY TRADE
Trade allows for mutually beneficial exchange:
• Instead of self-sufficiency, each actor concentrates on and earns income from what he does
best and trades for remaining needs
- Concentration on one activity allows for greater efficiency
- Each country can specialize in an area in which it has an advantage
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Heckscher-Ohlin Theorem:
• A country is best off specializing in producing goods that it is comparatively best at
producing and exchanging these goods for those it is comparatively less adept at producing
- Focus is on relative productivity rather than absolute productivity
• Abundant factors of production (capital, labor, or land) are
those inputs that a country possesses in greater proportion than
the world average
• Scarce factors are those possessed in smaller proportion than
the world average
- Example: Australia today is relatively abundant in
economic and human capital, intermediate in land, and
relatively scrce in unskilled labor
- Australia then exports capital and human capital
intensive goods and imports goods that are relatively
intesnive in unskilled labor
Adam Smith on comparative advantage:
• “If a foregin country can supply us with a commodity cheaper than we ourselves can make it,
better buy it off them with some part of the produce of our own industry, employed in a way in
which we have some advantage”
• Comparative advantage is determined by two things:
1. A country’s inherent endowments
2. The endowments of that country’s trade partners
Absolute vs. Comparative Advantage:
• Absolute advantage – one country is more efficient than another at producing one product
• Comparative advantage – even if a country is not the most efficient at a given product when
compared to other countries, it should specialize in what it does best
- Producing other products less efficiently wastes resources
Stolper-Samuelson Theorem:
• Abundant factors of production (and producers who use them) gain from freer trade
• Scarce factors of production (and producers who use those factors intensively) lose from freer
trade
• As export production expands, demand for the abundant factor rises relative to demand for the
scarce factor
• Free trade will lead to a contraction of the scarce-factor-intensive industry
• The Heckscher-Ohlin (H-O) theorem and the Stolper-Samuelson (S-S) theorem outline the
economic rationale for international trade (H-O) and the economic implications (S-S) of this
trade
• What is lacking are the political factors pushing back against a low-friction international trading
system
• The international trading system is far from being a globalization ideal
WHY TRADE????? - PROTECTIONISM
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Differences between economics and politics: economics and politics are two ways of allocating scarce resources (kindleburger 1970: 5) Politics uses a budget: economics focuses on the creation and distribution of wealth. Definition: wealth is anything (capital, land, or labor) that can generate future income; it is composed of physical assets and human capital (including embodied knowledge). (gilpin 1975: 227: political science focuses on power. Definition: [m]an"s control over the minds and actions of other men : power can take many forms (military, economic, or psychological), but it is fundamentally. Consumers: theoretically, trade benefits both sides. Producers can sell to new markets, expand business & increase efficiency. The political economy of trade: producers have concentrated interests in protecting their business and receive significant benefits from protection (e. g. profits, jobs, consumers have diffuse interests (e. g. lower prices) in free trade. Factors of production: land: farming or natural resources, labor: skilled or unskilled, capital: human or financial.
