ECON1089 International Trade: Openness Versus Industrial Pay

Manipulate economic models to analyse real world issues in international trade.

Analyse the fundamental determinants of the size and pattern of trade to verify its determinants and its effects on the wider economy/welfare.

Compare and contrast economic and political conditions in poor and rich countries to critically assess the incentives and consequences of trade liberalisation globally.

Assess the impact of protectionist policies on the welfare in rich and poor countries to decrypt the political economy of trade reform.

Using data from two countries, plot openness versus Industrial Pay Inequality (from UTIP-UNIDO) for each nation. Use two graphs, one for each country.

Using data from the two countries, calculate the correlation between openness and Industrial Pay Inequality (from UTIP-UNIDO) for each nation, respectively. Report and interpret this relationship in up to 100 words. [Hint: The Theil Index is used as a proxy for the ratio.

Figure1: The graph below shows the openness versus industrial pay inequality for Japan (Antras, Chor, Fally, and Hillberry, 2012).

Figure 1: openness Vs industrial inequality pay in Japan

The graph above shows the openness versus industrial pay inequality for Japan for which data was collected from the UTIP-UNIDO. The graph also shows how industrial pay inequality varies from year to year and the trade was relatively stable for all the years indicated.

justify;">Figure2; The graph below shows the openness versus industrial pay inequality Australia(Antras, Chor, Fally, and Hillberry, 2012).

The above figure shows the trade trend openness and industrial pay inequality for Australia. The World Bank data defined Trade Openness as the amount of trade expressed as a percentage of the Gross Domestic Product (Antras, Chor, Fally, and Hillberry, 2012). The graph shows the trade openness to be varying from one year to another, however, the industrial pay inequality in some years is below the starting point (0) (Wahiba, 2013).

Interpretation of the results.

Using the excel sheet, the trade openness and industrial pay inequality was correlated together using the collected data from the UTIP-UNIDO. The correlation for Australiahas been calculated as 0.67500 (Antras, Chor, Fally, andHillberry, 2012). The value implies that there is a strong and positive correlation between Australia’s industrial pay inequality and the trade openness. The graph shows an increase in the figures from the year of 1990 to 2005(Antras, Chor, Fally, and Hillberry, 2012). The increase indicates that the international trade has increased with an increase in the industrial inequality pay. Since the correlation is greater than 0.5 (critical value), then it is true to say that trade openness has a significant impact on the industrial inequality pay. As exports increase, demand for skilled labor force also increases which in turn increases the wages in those countries(Wahiba, 2013).

On the other hand, there is a weak and positive correlation between Japan industrial inequality pay and trade openness which is 0.0550. The figure above shows how an increase in trend fluctuates with the international trade (Jaumotte, Lall, and Papageorgiou, 2013).

Hence, it is clear from the graph that the industrial inequality pay in Japan is not so much influenced by the trade openness. It is due to the authority to industries in exporting by the government of Japan. From the graph, both variables are seen to have moved in the same direction from 1990 to 2000. However, both variables move in different direction after that period (Wahiba, 2013).

The analysis of the data using Stolper- Samuelson theorem

The theory of Samuelson, explores the relationship between the price of factors and output price like the capital and wage costs (Joachim and Wagner, 2018). It states that the return from the factor engaged in production of the good increases as the relative output price increases. The real wage tends to increase as labor is intensively used in the production although both unskilled and skilled labor tend to exist in an economy. In many economies, unskilled labor has got low productivity and hence low wage is paid to them as compared to the skilled labor (Wahiba, 2013). The trade openness mainly depends on the reduction of trade tariffs such as removal for trade liberalization policies and other trade licenses. In most cases, prices for exported goods increase as result of an increase in the export sector of the nation which rises the input demand such as capital and labor (Jaumotte, Lall, and Papageorgiou, 2013).From the equation that; P = bw + ar; where ‘r’ is the price of capital and ‘w’ the wage of the worker(Jaumotte, Lall, and Papageorgiou, 2013).

From using low costs which uses a relatively low factor, the sector initially expands. As a result of trade openness, the raising demand for the input used intensively, increases the prices for that particular factor. For stance, when a nation intensively uses labor for production, the openness of trade will be forced to raise the relative the prices of labor. This will imply that the factor prices will be equalized by the wage increase across the nation (Joachim and Wagner, 2018).

References

Antras, P., Chor, D., Fally, T. and Hillberry, R. (2012). Measuring the upstreamness of production and trade flows. The American Economic Review, 102(3), pp.412-416.

Jaumotte, F., Lall, S. and Papageorgiou, C., (2013). Rising income inequality: technology, or trade and financial globalization? IMF Economic Review,61(2), pp.271-309.

Joachim, Wagner. (2018). Temporary exports and characteristics of destination countries: first evidence from German transaction data. Economics, the Open- Access E-Journal. Vol.12, pg.54.Retrievedfrom: https://www.economicsejournal.org/economics/journalarticles/2018-54

Nasfi Fkili Wahiba. (2013). Trade Openness and Inequality. Journal of Knowledge Management, Economics and Information Technology. Scientific papers. Higher Institute of Management, Gabes University, Tunisia.