Gains from International Trade
Several policy-minded economists generally concur that international trade generates desirable outcomes (Hammond & Sempere 2006, p.146; Kemp & Shimomura 1997, p.121). In addition, some economists appear to favour policies that spur labour mobility among countries (Kemp & Shimomura 1997, p.121). Although there are some problems associated with international labour mobility such as overcrowding of urban centres and depopulation of remote areas, these issues are normally considered as exceptions to the broad concept that labour mobility has resulted in economic growth, particularly in the United States (Hammond & Sempere 2006, p.146).
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Nevertheless, the main question that an economic theorist must address is whether there is an economic model that can rationalize the bleak contrast between the common desire to encourage trade on one hand and curb migration on the other hand. For instance, Euwals and Roodenburg (2004) assert that international migration creates benefits and losses to natives of the host country (p.241). Therefore, there are some fundamental questions that must be addressed by economists.
These include: assuming that movements toward free trade are gainful, is there anything that is basically unusual about migration which obstructs it from bestowing similar benefits? Assuming that international migration might adversely affect the economic interests of some native citizens of the host country, is it any different from the adverse effects that free trade might bright upon those individuals with considerable investments in industries designed to be less competitive? These are some of the fundamental questions facing economists (Hammond & Sempere 2006, p.147).
The conventional trade theory does not offer much help since it only lends credence to special models wherein free trade brings about equalization/parity in international factor price. As a matter of fact, this phenomenon renders capital or labour mobility irrelevant. For example, Layard et al. (1992) assert that:
There is an overwhelming case for complete freedom of trade, including agriculture as well as industrial products…There is no special virtue in bringing Easterners to the West to produce labour-intensive goods, rather than enabling them to produce those goods at home and then sell them abroad (p.3).
Assuming that public goods are nonexistence, the key impediment to being conquered in attesting outcomes about the prospective benefits from migrations emerges given the apparent complexity facing a prospective migrant in being at several places at a time. As postulated by Malinvaud (1972) with regard to consumption in Lyon and Paris cities, such impediments result in non-convexity in terms of the feasible sets of consumers (p.22).
To be precise, an internationally mobile employee may be able to provide one day of labour on either side of Atlantic. Nonetheless, even if he/she can fly by Concorde, he/she will be unable to offer half a day’s labour in Europe and the other half in America (Hammond & Sempere 2006, p.149). For that reason, labour services cannot be treated in the same way as other commodities in an arrow-Debreu economy (Kemp 1987, p.453).
A second obvious impediment relates to public goods and externalities which have principally been ignored by the current literature regarding gains from international trade. With regard to migration, disregarding public good as well as the requirement to finance them is somewhat detrimental. Layard et al. (1992) assert that if a worker desires to migrate to another country that offers better economic prospects, he/she should be permitted to do so since labour mobility augments world output.
Although such migrations bring about externalities such as extra fiscal costs and social anxiety on native citizens, the curbs imposed on international migration are justifiable (p.7). Hammond and Sempere (2006) assert that public goods and externalities cannot annul (by themselves) either the gains from international migration or the gains from international trade. In any case, no one can possibly suffer loses if a freeze is imposed on terms of public goods as well as the obstruction levels that affect the costs of generating them (p.151).
Grandmont and McFadden (1972) observe that an esteemed proposition of the theory of international trade relates to Ricardo’s assertion that autarkic countries can gain a mutual advantage by participating in competitive international trade (p.109). The outcome is typically considered to be applicable subject to three conditions: one-consumer nations; manifold-consumer nations with decentralized domestic markets that are competitive; and manifold-nations with constraints that nations are minute traders in international markets (Grandmont & McFadden 1972, p.109). There are several literatures that offer a systematic and accurate argument regarding the case of one-consumer nations. In the case of decentralized manifold-consumer nations (with domestic markets that are aggressive), the benefits from trade proposition are presented as follows:
- Assuming there is an international competitive trade equilibrium allocation, any other possible allocation (under autarky) which creates some consumers worse off in a nation must consequently create other consumers better off.
- Assuming that an allocation is realized under autarky, domestic lump-sum transfers and the world’s system of trade prices will be present and will provide satisfaction for each consumer (Grandmont & McFadden 1972, p.110).
It is acknowledged that the core of an economy is characterized by a competitive equilibrium allocation whereby all consumers are domestically non-satisfied and externalities are nonexistent. In essence, this conclusion reflects proposition A. What’s more, under proposition A, there are no precise stipulations that factors are to be immobile, that non-increasing returns exist or that traders be minute. In fact, this proposition is related to the last two cases of world conditions whereby the proposition regarding the gains from international trade is considered to be valid (Grandmont & McFadden 1972, p.111).
Assuming that, originally, all economic agents in proposition A face equilibrium price vector and that m households benefit from the vector of utilities . Also, assume that a transformation in trade policy occurs and bring results in a new utility vector u* and a new equilibrium price vector p*. Generally, various aspects of u* will be larger than those in ū.
Nonetheless, there exists a lump-sum compensation scheme that involves each one of the m households in a manner that alteration in trade policy, as well as the adoption of the compensation scheme, leaves every household somewhat less off as in the original equilibrium. Assuming that the compensation scheme is present, we can presume the alteration in trade policy is potentially beneficial. Many scholars concur that an alteration in trade policy is potentially beneficial on the condition that the related maximum bonus is positive (Kemp & Shimomura 1997, p.124). Consider the following:
Let x (p) signify the surplus supply vector of the rest of the world such that Ep(p*, u*)- Fp(p*)- x(p*).
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Assume that B (p*, ū)>0 and consider the lump-sum compensation scheme described by Ej(p*, ūj) – yj (p*) – bj j –2, m (1)
Whereby uj is element j of ū whereas yj(p), j-1, m, represent the income of household j at prices p. The initial m-1 equations establish bj, j-2, m, while the last equation establishes uc1. Combining the members of (1) and bearing in mind that B(p*, ū)= F(p*) – E(p, ū)>0,
Hence E1(p*, uc1)>E1(p*, ū1) and uc1> ū1. In that case, if the
Has a compensated equilibrium p, each household is somewhat well-off similar to the original situation (Kemp & Shimomura 1997, p.129).
Proposition B seems to be valid with regard to the third world condition whereby each nation is considered a minuscule trader that lacks the ability to influence world prices through its own activities and therefore can provide a balanced trade net import bundle without disturbing the equilibrium of the international trade. One description regarding the mechanism of allocation inherent in the Samuelson-Kenen model relates to the fact that the government amasses information about preferences, produces a centralized computation of a decentralized Pareto optimal allocation and then dispenses incomes to execute the decentralization. The outcome is a national net import model that has attributes of a one-consumer excess demand function (Grandmont & McFadden 1972, p.113).
A different mechanism exists for producing Pareto non-inferior allocations to autarky. This mechanism is synonymous with the procedure present within a contemporary competitive welfare state. For example, take a distribution strategy that bestows every consumer with enough income to procure a bundle similar to the one acquired under autarky. Such a strategy is possible given that national income with trade (at known international prices) will be somewhat as big as the aggregate value of autarkic allocation at current prices.
Subject to this distribution strategy, the competitive nature of the nation’s manufacturers and consumers will result in a national import function of international prices. The function will not bear the attributes present in a one-consumer excess demand function. Nonetheless, it will possess attributes of aggregate excess demand typically needed to evaluate the presence of equilibrium in the market. In light of this viewpoint, the conjecture for proposition B is similar to the one necessary for Samuelson-Kenen model (Grandmont & McFadden 1972, p.113).
Gains from International Migration
The economics of international migration has grown somewhat separately from the economics of international trade. This phenomenon may partly be explained by the numerous non-economic intentions for international migration as well as the fact that international migration typically entails the transfer of both the factor and its holder. As a matter of fact, international trade and international migration have been addressed on the basis of their respective distinctive tools. For examples gains from international trade are characteristically assessed through the lens of general equilibrium models whereas gains from international migration are typically evaluated using partial equilibrium models (Kemp 1993, p.1).
Bearing in mind proposition A described above, assume that citizens within a closed economy are offered a chance to partake in international trade with the prospect of receiving immigrants and/or emigrating. Then proposition A will apply if emigrants are incorporated within the compensation plan and immigrant left out. With respect to labour migration, the fact that the owners migrate with factors does not influence the relevance of proposition A assuming that the preferences of emigrants do not alter with their country of residence.
What transpires with regard to immigrants’ preferences does not affect the relevance of proposition A (even though it apparently affects the degree of the gains) because immigrants are simply foreign suppliers of labour. What’s more, the fact that they spent their earnings in the host nation is of no relevance. It also does not matter if immigration and emigration happen concurrently because compensation is constantly computed on the basis of the original population (incorporating emigrants and leaving out immigrants) as well as according to the consumption and prices of the country of origin (Kemp 1993, p.3).
It can be assumed that the abovementioned reasoning is invalidated by non-traded consumption goods. Assume that non-traded commodities are part of the emigrant’s original consumption bundle and that those commodities are not entirely manufactured in the country of destination. Then, the migrant (after compensation) can procure his/her original bundle only if he/she goes back to his native country.
If he/she opts to stay in the host country, he/she is perceived as favouring an attainable post-trade (post-migration) bundle to the original bundle. Alternatively, assume that free trade is allowed in some commodities but the world’s borders are shut to migration. Afterwards, the borders are unlocked. As a result, it will be feasible to trade in other commodities. Apart from the unexciting diminutive-country case, one cannot be certain that a specific country (after compensation) will gain from expanded trading prospects. However, after the borders are opened, the world gains from a more competent allocation of its resources. Therefore, the potential improvement of welfare is likely to occur at least in one country (Kemp 1993, p.3).
Putting proposition B in focus, assume that the world equilibrium of international migration and trade is upset by the creation of a common market which comprises labour as well as manufactured goods. In this case, proposition B is relevant (it is comprehended that the general vector of external tariffs may encompass a levy on migration among member and non-member states). Therefore, if the compensation plan and tariff vector are meticulously computed, then all persons originally in the common market (as well as those who opted out of it) will gain from its establishment (Kemp 1993, p.4).
Assuming that all factor movements are excluded in the original world equilibrium, one can envisage the creation of a common market as taking place in two phases. With respect to the first phase, a customs union (that includes manufactured goods only) is created. In the second phase, all constraints regarding the intra-union movement of factors (such as labour) are taken out. Assuming that the compensation plan and the common external tariff (at each phase) are meticulously selected, the implication is that all individual union members will be made better off at each phase (Kemp 1993, p.4).
Several authors have argued that a country of origin cannot benefit from international migration. Their arguments are based on the inherent postulation that emigrants are left out of the compensation plan implemented by the host country. In contrast, other economics scholars base their arguments on special models to show that the original inhabitants of a country of destination essentially gain from free international migration and trade. As a matter of fact, these scholars fail to notice the common depiction that rendered by proposition A (Kemp 1993, p.4).
Euwals, R & Roodenburg, H 2004, ‘A note on the redistributive effect of migration’, Economics Letters, vol. 85, pp. 241-246.
Grandmont, JM & McFadden, D 1972, ‘A technical note on classical gains from trade’, Journal of International Economics, vol.2, pp.109-125.
Hammond, P. J., & Sempere, J 2006, ‘Gains from Trade versus Gains from Migration: What Makes Them So Different?,’ Journal of Public Economic Theory, vol. 8 no.1, pp. 145-70.
Kemp, M 1993, ‘The welfare gains from international migration’, Keio Economic Studies, vol. 30 no.1, pp. 1-5.
Kemp, M 1987, ‘Gains from Trade’, New Palgrave Dictionary of Economics, vol. 2, pp. 453-454.
Kemp, M & Shimomura, K 1997, ‘Trade Gains: A Unified Exposition Based on Duality’, The Japanese Economic Review, vol. 48 no. 2, pp. 121-131.
Layard, P.R., Blanchard, O., Dornbusch, R & Krugman, P 1992, East West Migration: The Alternatives, MIT Press, Cambridge, Mass.
Malinvaud, E1972, Lectures on Microeconomic Theory, North Holland, Amsterdam.