International trade reduces real
wages in certain sectors, when that sector is a competitor to the imported
products in a certain country. This reduction in real wages results in a
reduction in income, therefore a reduction in consumption. However, in the presence
of trade, imported products in that sector may be cheaper for households to
consume, thus mitigating the loss of income felt by workers in that sector. The
paper I have chosen to discuss is a study of how households can benefit from international trade as
it lowers the prices of consumer goods, even in light of the unfortunate loss
of income for some.
The author talks of many findings
about how households are affected as consumers and producers in terms of
international trade. Depending on the industry in which the households are “producers”
they could experience many welfare gains from international trade. However, if
the household is a worker in the local sector for the imported good, then their
welfare effects will be determined by the reduction in price of imported good
as it relates to the reduction in income. The article estimates that, in most
cases, the consumption effect is larger than the wage effect. Meaning, if the
reduction in consumption price is greater than the reduction in income, the household
should experience net welfare gains. The author also found that geography can
play a role in determining the consumption effect. Rural households may not
experience as much of a reduction in price as the urban households do, since
they are further from the trading centers.
To fully understand the income and
consumption effects on the welfare gains and losses, we must first decide if
labor is able to move among industries. In the case where labor is able to
freely move between sectors, it is likely that international trade will always
provide welfare gains for both countries, as the wage effect on these laborers
should only be temporary as they move to a different sector (maybe the
exporting sector or sector that doesn’t rival the imported goods). However, if
labor is not easily moved between sectors, it is likely these workers will have
to bank on the consumption effect being much greater than their loss of wages
to experience welfare gains from the international trade. It is important for
governments to keep an eye on this, as tariffs could cause the consumption
effect felt by consumers to drop (meaning higher prices), but a countering positive
wage effect as consumers move to the more local good. However, if the wage
effect by the local consumption of the good is not enough to counter the reduction
in the consumption price rising of the imported good, welfare could decrease.
Governments must not look to increase their own terms of trade at the expense of
their households’ welfare.
Matt, this blog does a fantastic job of explaining how households can benefit from international trade. I find it very interesting how even workers who are the producers of the imported good can benefit from importing it as long as the consumption effect is larger than the wage effect. The most interesting part to me was the discussion on how moveable the labor market is. To me, this raises the question how much? The question of how much needs to be asked when deciding to import a good. How much will this drop cost? How much of the labor force is effect? How transferable are the skills of those in that industry? Is this produced in an area where there is no other work? I believe an interesting research topic would be to see if trade effects urban or rural areas. What if any is the Correlation between these two? Maybe I will look into that on my next blog.
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