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International trade and investment.

The NBER's Program on International Trade and Investment, directed by Robert C. Feenstra of NBER and University of California, Davis, held its spring meeting in Cambridge on April 4-5. The discussion centered on the following papers and topics:

Jonathan Eaton and Samuel Kortum, NBER and Boston University, "Technology and Bilateral Trade"

Robert C. Feenstra, and Gordon H. Hanson, NBER and University of Texas, "Productivity Measurement and the Impact of Trade and Technology on Wages: Estimates for the United States, 1972-90"

James Harrigan, Federal Reserve Bank of New York, and Rita A. Balaban, University of Pittsburgh, "U.S. Wages in General Equilibrium: Estimating the Effects of Trade, Technology, and Factor Supplies, 1964-91"

Alessandra Casella, NBER and Columbia University, and James E. Rauch, NBER and University of California, San Diego, "Anonymous Market and Coethnic Ties in International Trade"

Donald R. Davis, NBER and Harvard University, "The Home Market and Economic Geography: Will Globalization De-industrialize Small Countries?"

Research Plans Focusing on the United States: J. David Richardson, NBER and Syracuse University; Matthew J. Slaughter, NBER and Dartmouth College; Linda S. Goldberg and Joseph Tracy, Federal Reserve Bank of New York; Lori Kletzer, University of California, Santa Cruz; Andrew Bernard, MIT; and Bradford Jensen, Carnegie-Mellon University Research Plans Focusing on Global Impacts: Robert C. Feenstra, Gordon H. Hanson, and James riga; Robert Z. Lawrence, NBER and Harvard University; Paul R. Krugman, NBER and MIT; Edward E. Leamer, NBER and University of California, Los Angeles; and Daniel Trefler, NBER and University of Toronto.

Innovative activity is concentrated in a small number of countries, but the benefits of innovation are experienced broadly. Eaton and Kortum develop a model of technology and trade to explore the role of trade in spreading the benefits of innovation. Their estimates imply an underlying elasticity of substitution among labor from different countries of around 3.5.

Feenstra and Hanson find that both foreign outsourcing and expenditures on high-technology equipment can explain a substantial amount of the relative increase in nonproduction wages that occurred during the 1980s. Comparatively, foreign outsourcing has a greater impact on the relative nonproduction wage than high-technology capital, but this result is somewhat sensitive to the specification that is used. Surprisingly, expenditures on high-technology capital other than computers are most important. Taken together, foreign outsourcing and expenditures on high-technology capital explain more than the observed increase in the relative nonproduction wage, which suggests that in their absence the relative wages of skilled workers could have fallen.

Wage inequality in the United States has increased in the past two decades, and most researchers believe that the main causes are changes in technology, international competition, and factor supplies. In this paper, Harrigan and Balaban view wages as arising out of a competitive general equilibrium where goods prices, technology, and factor supplies jointly determine outputs and factor prices. Treating final goods prices as being partially determined in international markets, and using data on trends in the international economy as instruments for U.S. prices, they find that changes in relative factor supply are more important than changes in relative price in explaining the growing return to skill. In particular, capital accumulation accounts for much of the increase in the skill differential.

Casella and Rauch model trade between two economies in which output is generated through bilateral matching of agents spanning a spectrum of types. Domestic matching is perfect - every trader knows the type of all others and can approach whomever he chooses - but international matching is random - every trader lacks the information to choose his partner's type. However, coethnic ties allow perfect matching abroad to those members of an ethnic minority who choose to use them.

In recent decades, because of changes in both policy and technology, there has been growing international economic integration. With declining barriers to trade, some analysis has suggested that countries with small markets may lose a distinctive component of their manufacturing base: goods produced under increasing returns to scale when the producers have some monopoly power. With lower barriers, producers of these goods may be tempted to locate in large markets and to serve the smaller markets by export. The small countries would be left to produce more homogeneous and competitive goods. However that analysis was premised on an assumption of convenience - transport costs only for the goods produced with scale economies - that indeed matters. Davis shows that in a focal case with equal transport costs for both classes of goods, small countries need not fear loss of this distinctive component of manufactures. He also discusses the available evidence, which indicates that total trade costs for these two classes of goods do not differ significantly.
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Title Annotation:rationale behind the decline in wages of unskilled workers
Publication:NBER Reporter
Date:Jun 22, 1997
Previous Article:International finance and macroeconomics.
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