Two-country World Research Articles

Comparing Trade Instruments Using Spreadsheets

This article describes the use of Microsoft Excel to illustrate how different trade instruments affect total welfare. The article highlights seven Excel worksheets that show different trade instruments and their effect on total welfare. The first worksheet shows the determination of world equilibrium price and quantity for a two-country world example. A second shows how the imposition of a tariff affects the equilibrium price and quantity for both countries and the welfare of consumers and producers in both countries. A third shows how these same variables are affected if the country imposing the tariff is small relative to all other countries in the world. Another shows graphically how to measure consumer and producer surplus. The final three worksheets compare the effects of a tariff, a subsidy, and a support price on consumers’ and producers’ welfare and government revenue.

Exchange rates, market structure and price-cost margins: evidence from a developing country

This paper analyses the sensitivity of firm performance to exchange rate fluctuations. In a two-country world, consisting of a developing domestic country and a developed foreign country, we show that this sensitivity is closely related with market structure and the share of imported inputs in total cost. When the share of imported inputs is low, depreciation leads to an increase in price cost margin. This increase intensifies in more competitive industries. When the imported input share is high, the price cost margin may decrease as a result of depreciation, and this effect becomes pronounced in more competitive industries. The empirical test where we used 3-digit Turkish Manufacturing industry data support most of the findings of our model.

On public investment, long-run growth, and the real exchange rate

This paper extends the Barro (1990) endogenous growth model with productive government services to a two-country world with perfect capital mobility, populated by optimising agents with uncertain lifetimes. It shows that increases in government spending on infrastructure for the home country result in higher growth rates and a terms of trade improvement. Both these effects are reversed after a point, showing that a hump-shaped curve--similar to the Barro curve, but with different properties--can be obtained here even with lump-sum taxes. We also examine the welfare implications of public investment policies, and characterise the world economy's dynamics. Copyright 2002, Oxford University Press.

Distortionary Domestic Taxation and Pareto-Efficient International Trade

This paper characterises the domestic tax systems which yield Pareto-efficient outcomes for a two-country world economy in which each country uses distortionary taxes. Such outcomes are compared with the Nash equilibria of the world economy when each country uses its domestic tax system to influence ist terms of trade. In such circumstances, the implementation of domestic tax systems which achieve a globally Pareto-efficient outcome as a Nash equilibrium will be very difficult, for two main reasons: the ability of countries to use tax policy with respect to non-traded goods for protection, and the fact that Pareto-efficient tax structures depend on countries‘ distributional judgements, which are hard to measure objectively.

Commercial policy and international factor mobility in the presence of monopolistic competition

This paper utilizes a well-known specification of returns to specialization (a variation of the Spence-Dixit-Stiglitz model) to explore the implications of local agglomeration effects for commercial policy and restricted factor mobility. The paper initially considers a small open economy where it is shown that a tariff reduces the degree of specialization and hence the size of the external economies to the producers. An inflow of labor increases the degree of specialization while a capital inflow decreases it. The paper then considers a two-country world where both countries are large and deals with the pattern of trade and factor mobility.

Fragmentation in simple trade models

This paper examines the effects of “fragmentation,” defined as the splitting of a production process into two or more steps that can be undertaken in different locations but that lead to the same final product. Introducing the possibility of fragmentation into simple theoretical models of international trade, the paper finds the effects of fragmentation on national welfare, on patterns of specialization and trade, and on factor prices. Models examined include the Ricardian Model and the Heckscher-Ohlin Model, both for small open economies and for a two-country world. Results are as follows: 1. If fragmentation does not change the prices of goods, then it must increase the value of output of any country where it occurs and that of the world. 2. If fragmentation does change prices, then fragmentation can lower the welfare of a country by turning its terms of trade against it. 3. Even in a country that gains from fragmentation, it is possible (but not necessary) that some factor owners within that country will lose. 4. To the extent that factor prices are not equalized internationally in the absence of fragmentation, fragmentation may be a force toward factor price equalization.

Explaining international comovements of output and asset returns: The role of money and nominal rigidities

Output and asset returns are highly positively correlated across the U.S. and the remaining major industrialized countries. Standard business cycle models that assume flexible prices and wages, in the real business cycle (RBC) tradition, have great difficulties explaining this fact. This paper presents a dynamic-optimizing stochastic general equilibrium model of a two-country world with sticky nominal prices and wages. The structure here generates cross-country correlations of output and returns that are markedly higher, and hence closer to the data, than the cross-country correlations that obtain when flexible prices and wages are assumed.

Explaining International Comovements of Output and Asset Returns: The Role of Money and Nominal Rigidities

Empirically, output and asset returns are highly positively correlated across the United States and the other major industrialized countries. Standard business cycle models that assume flexible prices and wages, in the Real Business Cycle tradition, have great difficulties explaining this fact. This paper presents a dynamic-optimizing stochastic general equilibrium model of a two-country world with sticky nominal prices and wages and a flexible exchange rate. The structure here predicts positive international transmission of country-specific monetary policy and technology shocks, and it generates sizable cross-country correlations of output and of asset returns.

Trade and relative wages: The role of supervisory function by skilled workers

The effect of trade on relative wages is examined taking into consideration some aspects of internal organization of firms, namely, the twin function of production and supervision by skilled workers. When trade is based on endowment differences, the effect of trade is greater than is predicted by the Stolper–Samuelson theorem. When trade is based on technological differences, freer trade tends to reduce the relative wages in each country in a two-country world economy.

Optimal monetary policy cooperation through state-independent contracts with targets

Simple state-independent monetary institutions are shown to secure optimal cooperative policies in a stochastic, linear-quadratic two-country world with international policy spill-overs and national credibility problems. Institutions characterize delegation to independent central bankers facing quadratic performance related contracts punishing or rewarding deviations from primary and intermediate policy targets.

A two-region model of redistribution, migration and international trade

This paper first considers a closed economy consisting of two regions and inhabited by workers of heterogeneous productivity. Each region in principle can redistribute income among its workers. Workers are free to migrate between the two regions. If the two regions differ in their extent of income redistribution, there generally are two types of worker allocation equilibria: equilibria where the two national distributions of labor productivity overlap, and equilibria where labor is stratified by productivity between the two regions. In a stratified equilibrium, the best workers reside in the region with the lowest level of income redistribution. The impact of changes in regional redistribution policy on worker allocation, regional production and the regional terms of trade are considered. The paper also considers a two-country world, with each country consisting of two regions. In this instance, national differences in regional income redistribution and labor productivity distributions are sources of comparative advantage and hence of international trade.

Explaining International Comovements of Output and Asset Returns: The Role of Money and Nominal Rigidities

Empirically, output and asset returns are highly positively correlated across the United States and the other major industrialized countries. Standard business cycle models that assume flexible prices and wages, in the Real Business Cycle tradition, have great difficulties explaining this fact. This paper presents a dynamic-optimizing stochastic general equilibrium model of a two-country world with sticky nominal prices and wages and a flexible exchange rate. The structure here predicts positive international transmission of country-specific monetary policy and technology shocks, and it generates sizable cross-country correlations of output and of asset returns.

Explaining International Comovements of Output and Asset Returns: The Role of Money and Nominal Rigidities

Empirically, output and asset returns are highly positively correlated across the United States and the other major industrialized countries. Standard business cycle models that assume flexible prices and wages, in the Real Business Cycle tradition, have great difficulties explaining this fact. This paper presents a dynamic-optimizing stochastic general equilibrium model of a two-country world with sticky nominal prices and wages and a flexible exchange rate. The structure here predicts positive international transmission of country-specific monetary policy and technology shocks, and it generates sizable cross-country correlations of output and of asset returns.

Fragmentation in Simple Trade Models

This paper examines the effects of defined as the splitting of a production process into two or more steps that can be undertaken in different locations but that lead to the same final product. Introducing the possibility of fragmentation into simple theoretical models of international trade, the paper finds the effects of fragmentation on national welfare, on patterns of specialization and trade, and on factor prices. Models examined include the Ricardian Model and the Heckscher-Ohlin Model, both for small open economies and for a two-country world. Results are as follows: 1. If fragmentation does not change the prices of goods, then it must increase the value of output of any country where it occurs and that of the world. 2. If fragmentation does change prices, then fragmentation can lower the welfare of a country by turning its terms of trade against it. 3. Even in a country that gains from fragmentation, it is possible (but not necessary) that some factor owners within that country will lose. 4. To the extent that factor prices are not equalized internationally in the absence of fragmentation, fragmentation may be a force toward factor price equalization.

Size of the government, welfare and labour supply in the presence of variable returns

This paper examines the effects of an exogenous change in labour supply on the size of the government and welfare in a model with a private consumption good, a pure public consumption good and an intermediate good. The production of the intermediate good is subject to variable returns to scale. The paper first analyses the closed economy and then considers trade patterns in the context of a two-country world. Trade pattern are analysed in two cases. In one case the intermediate good is traded but labour is immobile internationally, and vice versa in the other case.

Tax competition and redistribution in a two-country endogenous-growth model

This paper examines the effects of policy coordinationin a two-country world with endogenous growth and imperfect capitalmobility. Redistribution is financed by a source-based capital-incometax. Comparing the cases in which countries do and do not coordinatetheir fiscal policies, it is shown that redistribution can beinefficiently high if fiscal policies are not coordinated. Thisis because the negative effects of fiscal policy on home savingsaffect economic growth abroad by inducing a decline in foreigninvestment. This externality can dominate the well-known tax-baseexternality.

REINVESTED EARNINGS ON DIRECT FOREIGN INVESTMENT

ABSTRACTReinvested earnings on direct foreign investment are accounted for differently in A System of National Accounts 1968 and the System of National Accounts 1993. In this paper these treatments are compared in relation to the connection between national income accounting and macroeconomic theory. For this purpose, macroeconomic modelling is represented by an attempt to extend the closed‐economy Cambridge model of growth and distribution to a two‐country trading world.

Growth, welfare and optimal trade taxes: a fallacy of composition

Optimal export taxation rules out the possibility of immiserizing growth in a two-country world. Thus, productivity increases in the exporting sector must be welfare improving. This paper shows that in a multicountry world such reasoning commits a fallacy of composition. Simultaneous growth of exporting nations can lead to welfare losses in the presence of unilaterally optimal export taxes. Also, optimal export taxes can decline in response to such growth. This result further strengthens the possibility of perverse welfare movements. Thus, standard policy recommendations of increasing productivity in the exporting sector may lead to unintended and self-defeating outcomes.

Sunspots, currency substitution, and inflationary finance

This paper explores some issues surrounding inflationary finance of government deficits in a two-country world with currency substitution. Each country's monetary policy is assumed to be subordinate to fiscal policy. Private agents, knowing that the monetary authorities cannot commit themselves to fixed policy rules, substitute among the two monies. Each monetary authority is then forced to accomodate the actions of the fiscal authorities and private agents by setting monetary growth rates consistent with their decisions. This framework offers some interesting insights into the behavior of nominal exchange rates and their co-movements with relative money supplies and government deficits.

Payroll taxes and VAT in a labor-turnover model of the ?natural rate?

We explore the effects of the tax structure in our version of the labor-turnover model of unemployment. We show that for a closed economy, a shift to increased payroll taxation offset by a lighter VAT rate raises the natural rate of unemployment. However, for a small open economy whose interest rate is given by the world rate, the tax shift is neutral for employment. Extending the analysis to a two-country world exhibiting free international capital mobility, we show that a tax shift in either one of the countries raises the natural rate in both economies.