Thursday, April 08, 2004

DeLong extends the traditional trade model of comparative advantage to cover outsourcing

Brad DeLong's Semi-Daily Journal (2004): a Weblog
... Let's try a finger exercise to evaluate the effects of expanded international trade via 'outsourcing' on an economy. We'll set up a simple model--not a realistic model, an unrealistic model, a model that has only the features we absolutely need to understand the principal impacts of expanded trade on an economy...

...Now we can evaluate this change in four ways:

(1) Let's look at the worst-off--the workers. Their real incomes have risen by 4,000 thalers a year. That's a good thing.

(2) Let's look at total national product. The 75% of the population of the workers have seen their incomes rise by $4,000 thalers a year; the 25% of the population who are yuppies have seen their real incomes fall by $10,000 thalers a year. That means that the average person's real income has risen by $500 thalers a year. That's a good thing.

(3) Let's assert the psychological law that no matter how rich or poor you are that equal percentage increments to your income have equal effects on your material well-being. 75% of the population has seen their real incomes rise by 10%. 25% of the population has seen their real incomes fall by 8.3%. The average proportional increase is 5.4%. That's a good thing.

(4) Let's look just at the rich yuppies, because they are the people we see on TV and who give big campaign contributions. Their incomes have fallen by 10%. Bummer.
David Ricardo is the justly famed 19th century theorist who demonstrated the power of comparative advantage -- the true underpinnings of trade liberalism. Here DeLong extends the classic simplified model to cover outsourcing.

It's a good essay. I'm persuaded -- and I was skeptical. I see what he means. DeLong argues for interventions to ease the pain of transition -- as have I.

No comments: