Wenli Cheng

An Inframarginal Analysis of the Ricardian Model

This paper applies the infra-marginal analysis, which is a combination of marginal and total cost-benefit analysis, to the Ricardian model. It demonstrates that the rule of marginal cost pricing does not always hold. It shows that in a 2x2 Ricardian model, there is a unique general equilibrium and that the comparative statics of the equilibrium involve discontinuous jumps -- as transaction efficiency improves, the general equilibrium structure jumps from autarky to partial division of labor and then to complete division of labor. The paper also discusses the effects of tariff in a model where trade regimes are endogenously chosen. It finds that (1) if partial division of labor occurs in equilibrium, the country that produces both goods chooses unilateral protection tariff, and the country producing a single good chooses unilateral laissez faire policy; (2) if complete division of labor occurs in equilibrium, the governments in both countries would prefer a tariff negotiation to a tariff war. Finally, the paper shows that in a model with three countries the country which does not have a comparative advantage relative to the other two countries and/or which has low transaction efficiency may be excluded from trade.

A GENERAL-EQUILIBRIUM RE-APPRAISAL OF THE STOLPER-SAMUELSON THEOREM

This paper conducts a general-equilibrium analysis of the Heckscher-Ohlin model in which product price is endogenized. It applies both marginal and infra-marginal comparative-static analyses to examine the co-movement of factor and product prices. It shows that the Stolper-Samuelson theorems prediction does not always hold, in particular, it does not always hold inside the diversification cone when changes in production parameters lead to changes in prices; or when the general equilibrium jumps from one structure to another. The result of this paper supports the “everything-possible” theorem and casts doubt on the general applicability of other core trade theorems derived from the same framework as the Stolper-Samuelson theorem.

DOES TRADE IN INTERMEDIATE GOODS INCREASE OR DECREASE WAGE INEQUALITY

This paper develops two models to study the impact of trade in intermediate goods on wage inequality between skilled and unskilled labor in a developed country and a developing country. The first model assumes symmetric production technologies in the intermediate good. It predicts that trade in the intermediate good will increase wage inequality in the developed country, but decrease wage inequality in the developing country. The second model assumes asymmetric technologies in the intermediate good. It predicts that trade in the intermediate good can lead to an increase in wage inequality in both the developed country and the developing country.

Can Productivity Progress in China Hurt the USA? Samuelson's Example Extended

This paper develops a general equilibrium three-goods Ricardian model that extends Samuelsons example on the impact of productivity progress. Our model highlights Samuelsons insight that productivity progress can change the pattern of trade and in turn can have dramatic welfare implications. It also shows that while Samuelson is correct that productivity growth in one country can hurt another, the loss is not as permanent as his example appears to suggest. Continuing productivity growth in one country is likely to benefit all trading countries in the long run. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd

An Inframarginal Approach to Trade Theory

Inframarginal analysis represents a methodology that extends marginal analysis, using non-classical mathematical programming, in efforts to investigate corner solutions and indivisibilities. As such this approach has been used to reintroduce classical insights regarding the division of labor and economic organization to the mainstream of economic inquiry. One of the most prolific and useful relevant applications of inframarginal analysis concerns the area of international trade theory. The ensuing field of study has attracted considerable — and rapidly expanding — interest in recent years. Yet, little has been done by way of organizing the accumulated knowledge in a single volume. This book fills that gap by collecting key articles that mark distinct stages in the evolution of research in the area of inframarginal applications to trade theory. In this context the volume represents an excellent introduction of this novel and exciting field of study to the new researcher, and an invaluable source of reference to those seasoned in inframarginal applications to trade theory.

An Inframarginal Analysis of the Heckscher-Olin Model with Transaction Costs and Technological Comparative Advantage

In the paper we introduce technological comparative advantage and transaction costs into the Heckscher-Olin (HO) model and refine the HO theorem, the Stolper-Samuelson theorem, the Rybczynski theorem, and factor equalization theorem. The refined core theorems can be used to accommodate recent empirical evidence that is at odds with the core theorems.

Labour misallocation in China: 1980–2010

ABSTRACT This article measures labour misallocation in Chinese provinces over the period 1980–2010 and investigates possible causal factors of the misallocation. It finds that: (1) labour misallocation fell substantially in the first half of 1980s, but there was no monotonic trend of improvement since then. (2) Wage differentials cross primary, secondary and tertiary sectors accounted for a substantial portion of measured overall labour misallocation; the secondary sector’s wage deviations from value of the marginal product of labour (VMPL) also contributed to labour misallocation. (3) There was persistence in labour misallocation, but a higher level of urbanization, the development of the tertiary sector, increasing trade openness and the growth of the nonstate sector appear to have contributed to more efficient labour allocation.

International Transmission of Monetary Shocks and the Non‐Neutrality of International Money

Monetary shocks and how they are transmitted internationally are investigated in this paper. The paper shows that where a national currency is used as an international medium of exchange, the international money is non‐neutral. In particular, an increase in the supply of the international money leads to a transfer of real resources to the international money‐issuing country from its trading partner. It also induces an expansion of the nontradable sector in the international money‐issuing country, and an expansion of the tradable sector in its trading partner. The real impact of a monetary shock is greater under a fixed exchange rate system than under a flexible exchange rate system.

Who Should Be Given More Foreign Aid

This paper presents a simple model to investigate the effectiveness of foreign aid. It shows that foreign aid is most effective if it is given to a market economy with relatively high transaction efficiency. If transaction efficiency in a market economy is low due to, for instance, bad institutions or policies, then foreign aid will either be largely dissipated as transaction costs or can even lead to retrogression of market activities. In either case, it will be more effective to give foreign aid to poor primitive economies with no developed markets. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Asia Pty Ltd

ECONOMIC PERFORMANCE THROUGH TIME: A GENERAL EQUILIBRIUM MODEL

This paper presents a simple general equilibrium model of economic performance through time. The model incorporates four main determinants of economic performance: technology, capital investment, the division of labor and quality of institutions. It demonstrates that growth is not automatic even with technological progress. In order to maintain economic growth, it is important to continuously implement new technologies through capital investment. It also shows that institutional improvement promotes the social division of labor, which is an independent source of economic growth.