wordpress-themes.org wordpress themes wordpress themes

Proposition 1 tells us that looking for a simple correlation between openness and environmental quality is unlikely to be fruitful. Rather, we have to focus on the link between openness, comparative advantage, and pollution. Hence we need to take study the factors determining a country’s comparative advantage. In our model, comparative advantage is determined by the interplay of relative factor endowments and differences in pollution policy, (which are mainly due to differences in per capita income). To investigate the determinants of comparative advantage we solve for autarky relative prices.

Because preferences over consumption goods are homothetic and there are constant returns to scale in production we can use relative supply and demand curves to determine autarky prices. Recalling that p denotes the relative price of good x, let RD(p) denote the demand for good x relative to good y. Then the autarky relative price of good x is determined by the intersection of the (net) relative supply and demand curves
where the gross relative supply X = x/y is defined by (2.16), and net relative supply is (1-9 )c. Totally differentiating and using (2.13), we obtain an expression showing how autarky prices vary with income and endowments:
The pattern of trade is determined by the interaction of two influences: relative factor abundance and pollution policy. Pollution policy in turn is influenced by income. To show how each of these factors affect comparative advantage let us consider them separately.
Standard factor endowment theories predict that capital abundant countries should export capital intensive goods. In our model this need not be true because pollution policy can potentially reverse the pattern of trade. Nevertheless, capital abundance is still one of the key determinants of comparative advantage in our model. Because X is relatively capital intensive, an increase in к, holding all else constant, increases Home’s relative supply of X, and lowers Home’s autarky relative price of X. [Using (2.24), we obtain p < 0 since Sx,K > 0]. All else equal, an increase in the relative abundance of the factor used relatively intensively in the pollution intensive sector should increase the likelihood that a country will be an exporter of pollution intensive goods. More concretely, we can show that if the country is sufficiently capital abundant, it must export the capital intensive (polluting) good:
Proposition 2. Suppose the world price p is fixed. Then, for a given level of income I, there exists к such that if к > к, then Home exports X. Moreover, for such a country, the pure composition effect of trade liberalization will be to increase pollution.
Proof. For a given p and I, Home’s relative demand RD(p) is fixed. Relative supply x is given by (2.16) for the case where the economy is diversified in both goods. For given p and I, the unit input coefficients in (2.11) are fixed, and hence x approaches infinity as к rises. Consequently, there exists some к such that for к > к, x exceeds relative demand, and hence Home exports X. The increase in pollution via the composition effect follows from Prop. 1.