Trade Politics in Middle-Earth (Answers & Winner) -updated

Seth Cohn wins Commenter of the Day for getting all three answers to my Middle-Earth quiz right. Here are the answers with brief logic:

1. The Shire will export Longbottom leaf and import mithril armor and iron ore. (Logic: Being abundant in land and scarce in labor and capital, The Shire can make leaf more cheaply than other countries but is a high-cost producer of the others. This is known as the Heckscher-Ohlin Theorem.)

2. The price of Longbottom leaf will fall and the price of mithril armor rise in Gondor. (Logic: We can infer that Gondor exports mithril armor and imports Longbottom leaf from its factor endowments. According to the Theory of Comparative Advantage, opening up to trade reduces the price of the imported good and increases the price of the good that is now in demand in foreign markets.)

3. Owners of labor (workers) support free trade in Mordor, while capital and land support protection. (Logic: Workers benefit from free trade in goods and services in Mordor because free trade will raise the relative price of iron ore and reduce the relative prices of the other goods, since labor is the abundant factor of production and Mordor will export iron. The increase in the price of iron ore, which uses labor intensively, bids up wages of workers throughout the economy. For the same reasons, owners of scarce capital and land oppose trade because their incomes will be bid down. This is known as the Stolper-Samuelson Theorem.)

Update: Fellow Pileite Grover Cleveland reminds me that it is quite unusual to see a “politician” who is well versed in economic theory. Yes, Seth Cohn is a New Hampshire legislator – but not exactly a professional politician at $100 in salary per year.

7 thoughts on “Trade Politics in Middle-Earth (Answers & Winner) -updated

    1. That Wikipedia page is very poorly written. Yes, H-O has its problems, but for explaining 19th century trade patterns it works quite well, and even for understanding the 21st century politics of globalization, it’s a reasonable first cut if you define factors narrowly enough.

  1. i don’t think that’s true. i will admit i got lazy and did the shorthand version of linking to wikipedia, but i don’t think it does a good job of explaining modern trade patterns and certainly does a terrible job with 19th century trade patterns. the most profound problem with the analysis is that it predicts convergence when there is divergence. it can’t explain the growing disparity between rich and poor countries and has never explained those differences. please explain how H-O accurately described the fall into mass poverty and obsolescence of latin american and african countries and the protectionist takeoff of the United States and then Japan?

    1. H-O doesn’t predict convergence among economies, nor does it predict whether a government will adopt free trade or protection. It does predict convergence across economies in factor incomes, provided there is truly free trade across these economies. In the 19th century, the high-income countries indeed exported manufactured, capital-intensive goods, while the low-income countries & colonies exported raw materials. Today, H-O can’t explain why high-income countries both export to and import from each other highly differentiated goods like automobiles, but that lacuna is more accurately understood as a limitation of the theory than an inaccuracy or refutation. Still, it does well at explaining things like this: http://www.presseurop.eu/en/content/article/369061-angola-portugal-s-new-eldorado

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