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Trade models and Tariffs Support

Below is an excerpt from a September 10, 2006 Associate Press article on the breakdown of global trade negotiations.

The G-20 issued a statement Saturday indicating developing nations we unlikely to back off their demands that developed nations do away with subsides and tariff barriers from their farm products.

"Most of the the world's poor make their living out of agriculture. Their livelihood and standards of living are seriously jeopardized by subsides and market-access barriers prevailing in international agricultural trade" the group said in the statement.

Powerful farm lobbies in the U.S., Europe, and Japan, however, strongly oppose an end to subsides, a move they fear would leave them unable to compete with the flood of cheap imports.

A) Can the Specific Factors Model explain the position of the developing countries? What about the developed countries? Explain how these two positions are or are not consistent with this model.

B) Can the Heckscher-Ohlin Model explain the position of the developing countries? What about the developed countries? Explain how these two positions are or are not consistent with this model.

Solution Preview

1.The Specific Factors Model predicts that while labor can move freely between sectors, there are other factors specific to sectors or industries which are immobile. This model explains how price differentials drive trade. To induce the movement of labor, the export firms will raise wages. Since all labor is alike (the model assumes labor is homogeneous) the import-competing sector will have to raise their wages in step so as not to lose all of its workers. The higher wages will induce the expansion of output in the export sector (the sector whose price rises) and a reduction in output in the import-competing sector. The adjustment will continue until the wage rises to a level that ...

Solution Summary

Examination of whether the Heckscher-Ohlin Model or the Specific Factors Model correctly predicts the positions of developed and developing countries on tariffs.

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