Ravi Batra

Outsourcing and the Heckscher–Ohlin Model

The purpose of this paper is to incorporate the currently mushrooming phenomenon of outsourcing into the standard two-sector, two-factor Heckscher–Ohlin model of international trade. We first show how outsourcing modifies a firms production function, and then demonstrate that outsourcing generally raises the return to capital and lowers the real wage, although the nations GDP rises in proportion to the value-added in the outsourcing industry. Furthermore, the output of the outsourcing sector may actually fall even though its unit cost goes down; the output of the other sector then rises. By contrast, employment in the outsourcing sector may actually rise.

Environmental pollution and world trade

Abstract In this paper we present a model that highlights the relationship between international trade and environmental pollution. It includes a small open economy that produces a domestic composite good and imports another composite good and energy products. The pollution is created by local production, global production and transportation. Given this model we demonstrate that free trade within the current political and economic context may produce a suboptimal level of welfare. The rationale is based upon the argument that transportation is energy-intensive and that, therefore, trade itself is a source of pollution. Consequently, under certain global conditions the introduction of an energy tariff in a small open economy raises social welfare and is superior to free trade. A consumption tariff adopted by a single nation will not have similar consequences because it has no impact upon local usage. However, when a consumption tariff is globally adopted there is the opportunity for a net benefit. Finally, we argue that a global tariff that raises both the price of energy and the price of the imported composite good may generate the greatest increase in welfare by reducing both energy-intensive production and energy-intensive trade.

A Simple Two-Sector Model of Outsourcing

Outsourcing has become an increasingly contentious subject ever since N. Gregory Mankiw remarked in 2004 that outsourcing is just another way of doing international trade, and must be beneficial to the nation, including the workers. We construct a simple two-sector specific-factor model and explore the validity of Mankiws remarks. We find his ideas are valid when the country does not produce any outsourced factors work at home in that both the laborers and the nation benefit. But when some outsourced factor cum intermediate good is also produced at home, the nation still benefits but the workers may suffer.

Are Tariffs Inflationary

Economists universally regard tariffs to be inflationary and free trade to be deflationary, a view that this paper challenges. It is argued that while protectionism has generally created inflation in developing economies, the experience of the United States was totally different. Tariffs in the US were never associated with rising prices, and trade liberalization with declining prices. High tariffs were always followed by sharp drops in the cost of living. A theoretical model is developed to explain the deflationary effects of tariffs in the United States. Thus tariffs produce inflation only in nonmarket or dualistic developing economies, but not in advanced economies. Copyright 2001 by Blackwell Publishing Ltd.

Manufacturing and the Trade Balance

When the world shifted to the regime of flexible exchange rates after 1970, economists expected that large trade imbalances would soon disappear. Instead, such imbalances not only persisted but soared in the 1980s and 1990s, in spite of significant changes in important currencies such as the yen, the mark and the dollar. This paper reports that manufacturing importers tend to suffer trade deficits whereas exporters of manufacturing products tend to enjoy trade surpluses. The reason lies in the higher rates of productivity growth experienced by exporters of manufactures.

The US Trade Deficit and the Rate of Interest

It is well known that nations with high trade deficits normally have higher interest rates than those with surplus or balanced trade. However, such has not been the case with the USA, which has seen a relentless trade deficit since 1982. Its interest rates have been lower than those prevailing in many trade‐surplus nations. Furthermore, these rates fell even as the trade shortfall shot up, generating an interest‐rate paradox. This paper demonstrates that, unlike for other nations, the rising trade deficit itself became the cause of lower US interest rates, and this happened because of the worlds strong interest in maintaining a high value of the dollar.

Economics in Crisis: Severe and Logical Contradictions of Classical, Keynesian, and Popular Trade Models

The paper examines three popular models that form the foundation of modern economics. The author concludes that two of the three, the classical and the Keynesian, are seriously deficient in logic, whereas the third, dealing with gains from trade, is partially lacking in logic. Classical and neo-Keynesian approaches require desired investment to expand during recessions, whereas the trade model requires real GDP to rise without any rise in employment, capital stock, or technology. The paper offers an alternative macro framework that is free from the limitations of conventional models. Money is either neutral or non-neutral, depending on whether the economy is operating below or at full capacity. Wages are strictly determined in the labor market, yet employment is influenced by aggregate demand. The alternative model thus combines the attractive features of classical and Keynesian frameworks. Copyright 2002 by Blackwell Publishing Ltd.

Neutrality and Non-Neutrality of Money In A Classical-Type Model

Abstract. This paper modifies the simple classical model by introducing capacity utilization that varies across the course of the business cycle. By making the capacity usage a choice variable that turns out to be sensitive to changes in the price level, we show that the classical model loses its fundamental feature, namely the neutrality of money. In our generalized framework, a rise in money supply improves upon all the real variables if the economy suffers from excess capacity, as in recessions and depressions. We demonstrate that our model describes the various economic cross-currents during the Great Depression extremely well. Thus, monetary policy emerges with an activist role even in a generally classical setting.

A New Approach to Currency Depreciation

Currency depreciation has been studied conventionally in terms of three hypotheses-the elasticities approach, the monetary approach and the absorption approach. In this paper we offer another hypothesis called the price approach, wherein the balance of payment disequilibrium results from an inappropriate price level. Specifically, a country has a trade surplus if the equilibrium price level is below that compatible with balanced trade; by contrast, it has a trade deficit if the price level is above that compatible with balanced trade. We illustrate the price approach with the experience of currency devaluations that have occurred in emerging markets since 1997. Copyright

Trade Policies and Equilibrium Unemployment

In this paper we develop a simple general equilibrium model of trade to analyze the impact of tariffs and technical progress on the equilibrium rate of unemployment. We demonstrate that if a country imposes a tariff its equilibrium rate of unemployment is likely to rise, whereas the impact of technology on equilibrium unemployment depends on the labor intensity of the two sectors. Copyright 1999 by Blackwell Publishers Ltd and The Victoria University of Manchester