Autor Interview: Mastaneh Nikroo M1-20/04

Mastaneh Nikroo M1- 20/04
M1:
 - Autor interview: “Inequality, technological change, and globalisation”
Scares skills: higher reward. impact of trade and tech on jobs:
Trade (globalization) exposure depends on the characteristic of economy/sector, for example

being labor intensive. defused benefits and concentrated cost. causes unemployment among
less educated workers, increases all the costs of unemployment.
Tech (computerization) exposure depends on the possibility of machine substitution. For

example, there is much less opportunity in services and tourism than in administrative jobs
and production. More reallocation (or polarization) in jobs. For example toward professional
tec jobs.
Solution: skill training for change jobs, social insurance to ease transition between jobs.
In long run: making educational investments that is more durable
Cheaper machines => more mechanization of routine tasks
 - Wilkinson TED talk : “How economic inequality harms societies”
Physical and mental health and many social problems increase by inequality but not by GDP.
Japan and Sweden have relatively low equality; former has large income gap but reduce it by
income tax and other regulations/redistribution, and latter has less pre-tax difference
Inequality=> sense of superiority and inferiority, competition and consumerism, status

insecurity
 Stop tax heavens, employee ownership, more aggressive taxes
o Project Syndicate (2020): Link
Hundreds of millions of people are at risk of severe illness in low-income countries, most of
which lack the economic resources and medical infrastructure to fight back against the virus.
No part of the world will be more in need of support than Africa, South Asia, and Latin
America
Inequality => political gridlock(loosing public trust), social anxiety, social and political
unrest, rising tide of nationalism, slower growth, and polarization. The greater the inequality,
the more constraints there tend to be on talent, social mobility, and access to skills training
and education.hence less productivity. the political volatility generated by inequality creates
uncertainty, thereby undermining investment and business confidence.
rising inequality several causes: cut taxes for the wealthy, slashing social and economic-
redistribution policies that benefit those at the middle and bottom of the income distribution.
inequality grew within countries reflects their unique

economic circumstances and their particular blend of policies for managing trade,
deregulation, taxation, public spending, and redistribution.
China, Brazil, India, and Indonesia. Collectively home to more than three billion people,
these countries account for humanity’s largest-ever reduction in extreme poverty over the
past four decades. Roughly one-tenth of the world’s population lives in extreme poverty.
the world’s richest 1% captured twice as much as the bottom 50%.

Other inequalities: gender, minorities, rural/urban, race,…
Equality=> health, education, and security benefits

Policies: boost income and improve redistribution, reduce disparities and improve
opportunities, especially for the poorest and most vulnerable, investments in employment
and income opportunities for deprived communities, and in health, education, and social
protections, increasing the minimum wage and expanding collective-bargaining power to
ending discrimination against women and girls. More income taxes, earned-income discounts
at lower income levels, taxable child benefits, and universal minimum income policies
A NEW EMPIRICAL APPROACH TO CATCHING UP OR FALLING BEHIND-

Verspagen (1991)
Summary:
The importance and contribution of this paper is according to the fact that it disagrees with
the mainstream neo-classical growth model that claims in the long run differential growth
rates will disappear between nations. Verspagen theory also fits the historical data, in
contrast with the mainstream belief. While it is generally believed that countries that are
technologically behind will catch up faster because of the spillover characteristics of
technology, Verspagen argues that there are possibilities of falling behind as well depending
on the intrinsic learning capability of a country and its technological distance from the
leading countries. Intrinsic learning capability is determined by a mixture of social factors,
education of the workforce, the level of the infrastructure, the level of capitalization
(mechanization) of the economy, the correspondence of the sectoral mix of production in the
leading and following country, and other factors.
In this non-linear model, aG demonstrates that the spillover is proportional to the size of the
gap and the second part shows the learning capability which depends both on delta (intrinsic
learning capability) and gap itself. Kn and Ks represent the stock of the knowledge in North
and South countries and G is the technological gap. βn and βs are rates of growth of the
knowledge stock (due to research) for both countries.
Verspagen then calculates the growth rate of this gap using previous equasions, in which b is
βn - βs. In this model there is a possibility of three different scenarios, depending on delta,
visible in FIG1; first, b is larger than spillover, in this case there will be no equilibrium and
the gap will increase forever (falling behind); second, b (the difference between the rates of
growth of the knowledge stock) equals the spillover, which creates an unstable equilibrium;
and third, b is smaller than spillover which creates an unstable equilibrium and a stable one
(catching up). The next figure shows both stable and unstable equilibria and also it shows that
there is no equilibrium for small deltas. This graph also demonstrates that even if the
imitation (delta) goes to infinity, it will not be able to close the gap completely, as it is
bounded to b/a. This is only possible when b goes towards zero, which needs the expansion
of domestic research efforts. As a result, the difference between the growth rate of exogenous
technological advancement disappears. In other words, there is a “pre-catching up” phase in
which a country builds up its intrinsic learning capability and a “post-catching up” phase in
which domestic research activities begin to assume a greater importance than technology
spill-overs.
Questions
1. Define income inequality measures and describe recent trends
Gini coefficients
20:20 Ratio
Palma ratio
Hoover index
Galt score
Coefficient of variation
Wage share
Theil index
While globalization reduced the inequality between nations, it benefited more the top of the
income pyramid and increased the domestic inequality.
Reducing inequality generates significant positive economic effects (educate talents, political
volatility-> uncertainty and investment), as well as health, education, and security benefits
Solution: increase minimum wages and bargaining power, manage income taxes, policies to
boost income and improve redistribution
2. Why does technology matter for economic development?
Robotics and computerization -> change occupation from labor intensive jobs or the ones
which can be replaced by machines to jobs in service or the ones need higher skills. Hence,
productivity of labor increases in Cobb-Douglas production function: Y= Ka (AL)1-a
Also, in other models, such as Romer, when the ratio of skill workers to the labor force
increases, the whole productivity improves.
3. What is the economic mechanism linking technology and inequality?
In the transition to high skill jobs from labor intensive ones, some people may not gain new
skills and become unemployed. Technology can create inequality because of skill bias and
also due to the fact that innovators can ask for high rents.
M2:
The building blocks of economic complexity - Hidalgo and Hausmann (2009)

Summary:
This article introduces a method which creates a way to measure the amount of diversity of
activities (complexity of the country economy) to put the theory of Adam Smith into test.
According to this theory, the wealth of a nation is related to its division of labor and
diversity of non-tradable capabilities (e.g. infrastructures, educational system,
technological transfer) . They further show that this measure is correlated to the countries
level of income and also deviation from this measure provides a suitable forecast for the
future growth. In this method, they consider a number of capabilities necessary to produce a
product, and the number of final products in each country demonstrates the availability of
these capabilities in that special country. In the end they show the type of goods each country
will be able to produce is related to its level of economic complexity.
To do this, they use an adjacency matrix with node Mcp = 1 whenever country c is a
significant exporter of product p((RCAcp > 1) ). Kc0 represents the diversity of export and
Kc1 represents the ubiquity of those products which have been exported. Kp0 shows ubiquity
of the products and Kp1 is related to diversification of the countries exporting them.
Kc; 0:div, 1: ub (div), 2: div (ub(div))

Kp; 0:ub, 1: div (ub), 2: ub (div(ub))
Cca=1(probability r) if c has capability a, 􏰋 pa =1

(probability q) if p needs a. So, c will have p if this equation holds. N a: number of capabilities
in each country.
The correlation of this reflection method increases with GDP ppp and decreases with
population as it iterates. Also, we can anticipate some of the properties of a country’s future
growth and new exports based on its current productive structure.
Measuring the intangibles: A metrics for the economic complexity of countries and
Products- Cristelli et al. (2013)

Summary:
Countries commonly considered as developed ones are extremely diversified, exporting a
large variety of products from very simple to very complex. At the same time countries
generally considered as less developed export only the products also exported by the majority
of countries. This article also provides a measure for complexity of productivity in each
country, considering a non-linearity between the complexity of products and the fitness of
countries producing them. It also relates it to diversity of export. They measure the
development of a country as the sum of the product complexity of its exports. Products
exported by a small number of countries (less ubiquitous products), which are presumably of
high complexity value as produced only by few countries, are exported practically only by
highly diversified countries. This implies, as countries evolve becoming more and more
complex, they acquire a higher degree of diversification rather than specialization.
this implies that the acquisition of a new capability k

depends on the basket of capabilities already owned by country c, and therefore by
the basket of products that such a country already exports. correspond
: different between export with addition

on k0.
the higher is the number of capabilities owned by the country c, and

therefore kc, the higher will be the average advantage in productivity and export by the
acquisition of a new capability. This would indicate a difference in the evolution of
economies of respectively developing countries, which are rapidly increasing the basket of
exports, and already developed countries which are already in the set of top exporters. While
countries in the first group are expected to rapidly accumulate known capabilities already
owned by the best exporters, for top countries, with already advanced economies, one should
observe a slower step by step addition of new and more and more complex capabilities with a
high impact on the economy, basically by developing new technologies. One could also
conclude that poorly diversified countries can only improve their situation by a radical
change of economic/political system
F(n): estimate of the fitness of all countries , Q(n) :the quality of all products after n
iterations.
the fixed point of Eq.(8) does not depend on the initial condition, the metrics proposed are
measuring an intrinsic property of the Mcp matrix.
1. unweighted (GDP per capita, intensive) M: to measure a very large RCA , a country
typically must own a very large share of the export of a product and, at the same time, this
product must have a much lower average share of the world wealth (crude oil). But most
diversified countries, which include the richest and most advanced countries, on average are
characterized by a more homogeneous set of RCA values which appear to be not dominated
by a single product . In this way, the choice of RCA coefficients for weighting Mcp would
favor those countries with a low diversification.
2. Weighted (GDP, extensive) (0,1)M: each exporter of a product is weighted according to

the owned share of that product, however the sum over all exporters of each products is
normalized to one. That is, products are considered intensively. In other words we are not
taking into account that different products have in general a different share of the global
export. independent on the volume export.
qcp giving the total export of one product p
intensive analysis is able to spot niche of competitiveness, while extensive metrics moves the
focus of the analysis to the scale of the economic system . intensive fitness conveys long-term
. intensive metrics is a measure of potential of growth (especially for emerging countries) and
somehow a measure of resilience and recovery features of economic systems (especially for
developed countries). Weighted: present and short term perspectives.
successfulness of a country is given by the

average of the ‘‘complexity’’ of its products.
development of a nation: development of capabilities indeed, but also national policies, wars,
geo-political instabilities, importance and development of financial sector,
In mature developed countries, politics, in particular economic ones, and in general non-
capabilities driven features appear to dominate the growth and the evolution of these
countries. they almost saturated the space of capabilities, hence the space of products. In fact
the development of new, and generally of high technological value, capabilities in developed
countries usually triggers bursts of new high complexity products on the market. However,
these events tend to be rarer.
the fitness of a country is an extensive variable with respect to the number of products
exported.
information on the complexity of a product is mainly due to the less competitive countries
among all its exporters. The translation in mathematical terms implies that the fitness (i.e.
competitiveness) of countries and the complexity of products must interact in a non-linear
way. present methodology represents a very effective fundamental analysis for the
assessment of country competitiveness and for the potential of growth (or recovery) of an
economic system. In addition it can have a concrete impact in the evaluation of financial
markets identifying long term growth trends as well as systemic instabilities
Questions
1. Why, according to the authors, can trade data be used to evaluate economic capabilities?
When a country produces and exports certain products, it justifies that it has required
capabilities for those productions. And this shows their level of economic complexity.
2. Discuss and compare the approaches used in the two papers
Both provide measures for complexity of productivity in each country, one linear(taking
average) and one non-linear.
Arstechnica
Economic fitness (complexity), which depends on the export and diversity in export is related
to GDP. Also its trajectory can be used to forecast GDP in the future.
Another important factor is that there is a kind of self-similar behavior in trajectories. Even
though the total size of the economy might be different, countries with similar ratios (I’m
simplifying here) of economic fitness to GDP experienced similar trajectories.
Countries with a very low economic fitness are incredibly difficult to predict. the poorer you
are, the more subject you are to the random buffeting of economic noise.
M3: Note: Read first the Overview of the World Bank Development report (World Bank,
2020), as it presents and describes Global Value Chains. Then the academic article by
Giovanni et al. (2018) presents a framework to understand the role of multinational firms in
such networks and how such networks propagate shocks. Finally, the last two short readings
illustrate the cases of two types of shocks: the Coronavirus crisis (see IPP Policy brief) and
trade wars (Voxeu, 2019).
The micro origins of international business-cycle comovement - Di Giovanni et al. (2018)
Summary:
This paper investigates the role of individual firms in international business-cycle
comovement at both the micro and macro levels. The authors claim that countries that exhibit
greater bilateral trade and multinational production linkages, have more correlated business
cycles. To do this they use French firm-level value-added, destination-specific imports and
exports, and cross-border ownership.
Empirical challenges so far:
1. Critique by Imbs (2004) that countries that trade more with each other are similar in other
ways, and thus subject to common shocks.
2. The coarse nature of the cross-country setting makes it difficult to learn about the micro
foundation of this relationship
Advantages of examining cross-border comovement at the firm level rather than the
traditional approach (GDP correlations):
1. At the micro level: data allow for precise measurement of trade and multinational linkages
(firm × country), and to control for common shocks using appropriate fixed effects
(overcomes the first challenge).
2. At the macro level: it captures the aggregate comovement implications of heterogeneity

across firms in both size and the extent of international linkages.
They first relate the correlation of firm total value-added growth with foreign GDP
growth to firm-level direct linkages to that country.
Linkages between firm and country:
1. Importing from it
2. Exporting to it
3. Being a France-based affiliate of a multinational firm headquartered in that country
4. Being a French firm with a foreign affiliate in that country
Estimation (controlled for both firm and country effects) find 1,2, and 3 increase the
correlation significantly.
Second, in addition to firm-level information on input purchases and domestic sales, they use
the sector-level input-output table to construct proxies for indirect linkages between
French firms and foreign markets. This way they measure the amount of French firms’
interactions with internationally connected firms in buying (downstream) and selling
(upstream) processes.
Third, they analyze the macro implications of the micro-level findings. They find the
aggregate business-cycle correlation between France and another country equals to the
weighted sum of the correlations of firm-level total value added with that country (for
directly and indirectly connected firms). Large directly connected firms are significantly
important here.
Finally, they find trade linkages are about 10 times more important in generating aggregate
comovement than multinational linkages.
Framework:
Xt = ∑f∈It Xft ,
Xt: total value added by all French firms in year t
Xft: value added of firm f in year t
It: the set of firms f operating at t
γAt= Xt/Xt−1 − 1 = ∑ wft−1γft

f
γAt: growth rate of aggregate value added

γft : the growth rate of value added of firm f
wft−1 : share of f ’s value added in total French value added
γCt : GDP growth of a foreign country C
Correlation:
σf : standard deviation of γft
 the aggregate business-cycle comovement (correlation between the French economy

and another country economy) = weighted sum of the firm-level correlations
This correlation is defined as:
With: whether the firm exports to there (EXf, C), imports from there (Imf,C), is a French
multinational with affiliates in C (HQf, C), or is an affiliate of a foreign multinational
headquartered in C (AFFf, C) all binary
Using country FE causes disentangling transmission of shocks through trade from common
shocks.
These equations capture indirect linkages, namely downstream and upstream effects
respectively. i and j index sectors, f belongs to sector j ,
IOij : share of spending on domestically produced sector i inputs in production in sector j
NIMi, C : number of French firms in sector i that import from C
NEXi,C : number of French firms in sector i that export to C
Ni : total number of firms in sector i
INPUTINTf : firm’s total input usage intensity= total material input spending divided by
material input spending plus wage bill , averaged across years
DOMINTf : domestic sales intensity= share of firm f sales that goes to the domestic market ,
averaged across years
Comprehensive format:
Macro level analysis:
IC: direct linkage, IcC : the

rest
Results show that direct links are responsible for the observed aggregate comovement.
If directly connected firm f is no longer connected with C, the impact on correlation=

And in aggregate:
On average the aggregate correlation would decrease by about 0.098 (the mean actual
observed correlation is 0.29) if firms stopped being connected, and on average, trade linkages
account for more than 90 percent of the total (0.090 out of 0.098).
If wf = 1/N ∀f then Δ ρA | Eq. W. = 0.024 => larger firms are more important here.
For indirect linkage: (upstream and downstream= 0 for firm f)
There is a strong and robust positive contribution of indirect linkages to comovement, driven
by the manufacturing sector. Finally, direct and indirect linkages combined can account for
two-thirds of the observed aggregate comovement between the overall French economy and
its trading partners.
World Bank (2020), “Trading for development in the age of Global Value Chains”
(Overview) Global value chains
A global value chain breaks up the production process across countries. Firms specialize in a
specific task and do not produce the whole product.
Raw material (services inputs)->intermediary goods(parts)->finished goods
GVCs can continue to boost growth, create better jobs, and reduce poverty— provided
that developing countries undertake deeper reforms and industrial countries pursue open,
predictable policies.
Since 1990, Productivity and incomes rose generally and specially in countries that became
integral to GVCs—Bangladesh, China, and Vietnam, among others. as technological
advances—in transportation, information, and communications—and lower trade

barriers induced manufacturers to extend production processes beyond national borders
After 2008 GVC slowed down: reasons: decline in overall economic growth, and investment.
slowing pace and even reversal of trade reforms. the fragmentation of production in the most
dynamic regions and sectors has matured(China is producing more at home). Protectionism
->policy predictability should be restored else firms will not invest in that country with
uncertainty
Threats: 1. Labor-saving tech reduces demand for labor 2. Trade conflict
national policies can revive trade growth and ensure that GVCs are a force for development
rather than divergence. The benefits of GVC participation can be widely shared and sustained
if all countries enhance social and environmental protection.
Hyperspecialization enhances efficiency, and durable firm-to-firm relationships promote the

diffusion of technology and access to capital and inputs along chains. biggest growth:
transition out of exporting commodities and into exporting basic manufactured products
using imported inputs.
limited manufacturing -> advanced manufacturing and services-> innovative activities (needs
more skills, connectivity, and regulatory institutions). they enhanced productivity ->
expansion in firm output ->increases employment -> structural transformation in developing
countries, drawing people out of less productive activities and into more productive
manufacturing and services activities
negative side: low glass ceilings, increase inequality in skilled and unskilled workers’ wages,
tech change biased towards capital value added, environment.
Tech increases efficiency, reduce demand for labor intensive works in developing countries
but increases trade as it increases productivity and import for production in developing
countries.
GVC participation depends on: endowments, geography, market size, institutions, and policy.
PLICY: trade liberization (overcoming local limits of supply and demand), Improving
transportation and communications infrastructure (overcoming remote location), integration
into GVCs agreements (institutional and policy reform)
Pricing environmental degradation , energy and production subsidies, taxing carbon
Any production disruption at one point of the chain mechanically affects the following steps
in the production process, something which is sometimes described as a cascade effect
general equilibrium effects: The negative productivity shock in China has a feedback
impact on foreign firms through demand. foreign firms gain market shares over their Chinese
competitors. Chinese GDP shrinks which reduces foreign exporters’ sales in China. relative
prices adjust across countries, in a way that directly depends on the structure of value chains
elasticity of substitution: firms all around the world will adjust by switching to inputs that
are not produced in China. any increase in the price of Chinese inputs is proportionally
compensated through substitution towards non-Chinese inputs
GVC has helped firms benefit from additional efficiency gains through specialization. But
this organization of production into concentrated(china) value chains has external effects due
to their lack of resilience to shocks. They may want to adjust by diversifying their production
process.
Trade wars in the global value chain era
GVCs amplify the effects of tariffs. Pay multiple times the custom tariffs. => trade wars
induce firms to shorten or otherwise reshape their global supply chains. some of the costs of
trade protection may ultimately be borne by upstream producers in the country imposing the
tariff,3 while some of the producer-side benefits from trade protection enjoyed by local
import-competing firms may be passed along to foreign interests.
GVC has been made possible by innovations in communications and transportation
technologies, together with institutional and market reforms.
The extent to which producers in each country bear the costs of the tariff depend on a host of
factors, including market power, bargaining relationships, input customisation, and trade
volumes.
firms choose to consolidate that production depends on a host of factors, including proximity
not only to expected consumers but also to raw material, critical input suppliers, local
economic regulations, policy certainty, access to skilled and low-cost labour, and more
GVC trade means that the costs and benefits of higher tariffs – and by extension, trade wars –
may extend well beyond the immediate ‘intentional’ targets to include countries and
companies around the world, including the very country that imposed the new protection at
the outset.
trade war) causes firms to change how and where products are made in the world, this
additional production dislocation will carry additional efficiency, job, profit, and welfare
losses.
IPP Policy brief*

Help firms: delay the payment of employers’ contribu- tions, by helping them to switch to
partial unemployment schemes and by offering small firms collateral for liquidity loans.
moral hazard: Firms hit by the id- iosyncratic shock in China will not have an incentive to
improve the diversification of their value chain if they fore- see the possibility of a bailout
in case of a shock.
Having a European-level dataset of firm-level input-output linkages would be a first path
towards better identifying supply chain fragilities. Building such statistics is necessary to
provide targeted aid for firms in response to future shocks on value chains.Moreover,
identifying such vulnerabilities will open the door to policies forcing firms to internalize the
consequences of the lack of resilience of their value chain on the French economy.
Questions:
1. The articles discussed in Meeting 2 focus on the trade of final products. Instead, with
the rise of Global Value Chains, we now refer to global trade flows as “trade in tasks”
(see Figure 1 above). Does that make the economic complexity/fitness indices less
relevant? (hint: relate a change in a country’s “sophistication” of its participation in
GVCs – Fig O.4 - to a change in economic complexity/fitness).
2. Why is the framework developed by Giovanni et al. (2018) relevant to explain the
economic impact of the Coronavirus?
3. What is the difference between such a supply shock and the impact of trade wars on
GVCs?
M4:
Directed technical change: framework and implications - Acemoglu (2002)
Summary:
The elasticity of substitution between different factors defines how powerful these effects are,
determining how technical change and factor prices respond to changes in relative supplies. If
the elasticity of substitution is sufficiently large, the long run relative demand for a factor can
slope up.
Technical change over the past 60 years was skill biased, and the skill bias may have
accelerated over the past 25 years
biased technical change is likely to increase the income gap between rich and poor countries
international trade may induce skill-biased technical change.
technical change tends to be generally labour augmenting rather than capital augmenting.
a large wage push, as in continental Europe during the 1970's, may cause capital-biased
technical change and affect the factor distribution of income.
Over the past 60 years, the supply of skills(college) has increased, but returns to college
didn’t fall because of this large increase in supply; on the contrary, there has been an increase
in the college premium (because of the skill bias). late eighteenth and early nineteenth
centuries have been unskill biased (skill replacing). The wage rate has increased steadily,
while the rental rate of capital has been approximately constant. This pattern indicates that
most of the new technologies are labour augmenting.
Two forces driving innovation:
1. scarce factors: the price effect, which creates incentives to develop technologies used
in the production of more expensive goods
2. abundant factor: the market size effect, which encourages the development of
technologies that have a larger market
Results:
1. Weak induced-bias hypothesis: an increase in the relative abundance of a factor

creates some amount of technical change biased towards that factor.
2. Strong induced-bias hypothesis: if the elasticity of substitution is sufficiently large

(greater than a threshold between 1 and 2), the induced bias in technology can
overcome the usual substitution effect and increase the relative reward to the more
abundant factor (long-run demand for that factor increases). This may be because of
the underlying "increasing returns to scale" in the R&D process: a new machine, once
invented, can be used by many workers.
this graph represent relative demand

curves for constant-technology, weak induced-bias hypothesis (increase in Z/L supply creates
TC bias and higher wages), and strong induced-bias hypothesis (large TC bias shifts the
demand curve slope and the reward of the abundant factor (Z/L) increases) when the Z/L
supply increases.
production function: F(L, Z, A), L: labour, Z: capital, skilled labour or land. A: technology
index, assumption: aF / aA > 0
F(AL, Z): L augmenting TC : TC is L-biased (TC increases the

marginal product of L more than that of Z)
constant elasticity of substitution (CES) production function:
AL , Az :technology terms, γ ∈ (0, 1):distribution parameter, σ ∈ (0, ∞): elasticity of

substitution between the two factors.
If σ = ∞: perfect substitutes, linear y. If σ = 1, Cobb-Douglas y (I think here y=1∞= 1). If σ =

0, no substitution, Leontieff y, Q=Min(Z,L) (I think here y=0).
σ > 1, factors are gross substitutes. when σ < 1, gross complements.
AL is L-augmenting (labour complementary) and Az is Z-augmenting.
marginal product of Z and L. Usual substitution effect: MPZ decreases if Z, Z/L increases
If σ < 1, Az is L-biased: an increase in the productivity of Z increases the demand for labour,
by more than the demand for Z, effectively creating "excess demand" for labour. MPL
increases by more than MPZ.
Profitibility of developing Az relative to AL is proportional to:
an increase in the relative abundance of Z causes Z-biased TC.
If σ is large, increase in the relative abundance of a factor increases its relative reward
(upward sloping demand curve)
THE DEMAND SIDE
determinants of the factor bias of TC:
1. environment:
consumer preferences:
ρ: rate of time preference, θ: coefficient of relative risk aversion (intertemporal elasticity of

substitution)
budget constraint :
I: investment, R: R&D expenditure, ε: elasticity of substitution between two goods,
β ∈ (0, 1), L & Z: total quantities of the two factors,

xL&Z: L (or Z)-complementary intermediates or machines supplied by "technology
monopolists", N: range of machines, their rent: χL(j) .
Nz/NL: relative productivity of Z.
Equilibrium
market clearing relative price :
factor and product prices, WL, Wz, PL, and pz, that clear markets
L(Z) intensive firms maximization problem:
=>
Profit of monopolist: , ψ: cost of producing machines,
? assumption: =>
net present discounted value of profits is important : r:

interest rate,V: present discounted value of future profits,. V-dot: future profits may not equal
current profits
if V-dot=0: The price effect (PL,PZ) The market size

effect(L,Z) encourages innovation in that direction.
Substitute xL&Z: and get the price
substituting YL&Z:
Sunbstitute in profitibility:
depends on both market size(positive if σ > 1) and relative price. When the factors are gross
substitutes, the market size effect dominates. And when they are gross complements, the
price effect dominates.
For wages(rewards): first, it decrease by

aboundance. Second, the relative physical productivity (N z / N L ) increase relative reward if
σ > 1. Z -biased TC
THE SUPPLY OF INNOVATIONS: THE INNOVATION POSSIBILITIES

FRONTIER
The innovation possibilities frontier = "state dependent": current R&D directed at factor Z
reduces the relative cost of Z-complementary R&D in the future. The state dependence,
causes past innovations complementing a factor make current innovations directed at that
factor cheaper.
RL&Z : spendings on R&D for the final L(Z)-

intensive goods. one unit of final good directed at L(Z)-complementary machines will
generate ηL&Z new machine types. "technology market clearing" condition: equation 20 in
(assuming NL and Nz grow at the same rate. )
η = ηZ / ηL , this equation shows that the direction of technical

change (bias) endogenized.
and for wages: the response of relative factor rewards to

changes in relative supply is more elastic here.
"strong induced-bias hypothesis": that if σ is sufficiently large(σ > 2), the relationship
between relative factor supplies and relative factor rewards can be upward sloping. Usually
this relation should be negative, but here because technology is endogenously biased towards
more abundant factors, the overall effect of factor abundance on factor rewards is ambiguous.
Factor shares in GDP:
To calculate growth we maximize : => g=
The direction oftechnical change with knowledge-based R&D
In knowledge-based R&D, spillovers imply that current researchers causes the marginal
productivity of research to increase. Also there is a constant supply of scientists equal to S.
δ: degree of state
dependence.
New condition for technology market clearing:
Equilibrium relative technology:
equilibrium skill bias (Z is skilled workers)(the weak
induced-bias hypothesis) and if , then we have the strong induced-bias

hypothesis
the long-run skill premium
When the two factors are more substitutable, the market size effect is stronger, and
endogenous technical change is more likely to favour the more abundant factor. The second
determinant of the direction of technical change is the degree of state dependence in the
innovation possibilities frontier.
APPLICATIONS (WITH LIMITED STATE DEPENDENCE)
1. When δ<1, Endogenous skill-biased technical change
supply of skills: (the number of college equivalent workers divided by noncollege

equivalents)
When : having σ large enough, the market size effect is so powerful that it not
only dominates the price effect on the direction of technical change, but also dominates the
usual substitution effect between skilled and unskilled workers at a given technology. An
increase in the relative supply of skills makes technology sufficiently skill biased to raise the
skill premium.
when the
economy is hit by a large increase in H / L. If this is not anticipate, technology will not have
adjusted by the time the supply of skills increases. The initial response of the skill premium
takes technology as given => the skill premium will first decline, but then as technology
starts adjusting, it will rise rapidly.
2. Directed technical change and cross-country income differences:
Directed TC implies that technologies will be designed to make optimal use of the conditions
and factor supplies in the developed countries (North). Therefore, they will be highly
inappropriate to the LDCs'(less developed countries) needs. Directed technical change will
determine how inappropriate technologies used by the LDCs' are to their needs and via this
channel, directed technical change will influence the income gap between the North and the
LDCs (with H’ and L’).
: price of copying new machines in LDCs. This is =1 in the North.
 .
Κ<1, so that machine prices are higher and fewer machines are used in the LDCs than in the
North.
since , when σ
>1, an increase in NH / NL reduces Y'/Y and raises the income gap (a society with
more skilled workers benefits more) and opposite is true for σ <1.
Skill-biased technical change increases the income gap between the LDCs and the
North.
Equilibrium technologies will be too skill biased for the LDCs.
3. The effect of international trade on technical change (δ=0) =>
Simple model+trade: a single world relative price of skill-intensive goods, pw=

with
Becase skille-intensive goods are more scarce in the world than in the North: As
price and market size are two factros that shape TC, this will change it. Also this encourage
inovation for the scares factor (skill).
the only difference because of trade is lambda>1 => trade

increases the physical productivity of skilled workers more than that of unskilled workers
Increase in the skill premium in the Nort:
+directed technical change:
trade opening could induce skill-biased

technical change and increase wage inequality more than predicted by standard trade theory.
Yet, this conclusion is obtained only when skilled and unskilled workers are gross substitutes.
form of the innovation possibilities frontier-how relative costs of different types of innovation change with the
current state of technology. state dependence: past innovations complementing a factor make current
innovations directed at that factor cheaper
thinking about skill-biased technical change a specification with only limited state dependence leads to more
plausible results, while in the case of capital- and labour-augmenting technical change, a specification with
extreme state dependence appears more appropriate.
4. The Habakkuk hypothesis
Rapid technical change or technology adoption in the U.S. economy during the ninteenth
century resulted from the relative labour scarcity in the U.S., because labour scarcity
increased wages, and encouraged firms to develop and adopt labour-saving technologies.
(Assumptions: Z is land here and no Z innovation) Question: how lower L/Z, L
scarsity, cases higher NL? =>
with Lambda = suitably defined constant.
If , then (scarcity of labour (for a given supply of land) discourages the

development of new technologies.) and vise versa.
Skill-biased technical change with only limited state dependence leads to more plausible
results, while in the case of capital- and labour-augmenting technical change, a specification
with extreme state dependence is more appropriate.
Key concepts to understand:

Secretary:
In figure one the amount of skill workers(Z) increases. In this condition the wages should go
down but instead it goes up. This is because of the technical change bias towards skill and
therefore higher wages (Collage wage premium).
 Discuss Figure 2 (Simone) >> when is the demand curve upward sloping? (Insa)
In this figure, the traditional case shows a downward sloping curve. The X-axis corresponds
to factor abundance ratio, Z/L. L is simple labor and Z can be land, capital, or skill worker.
Y-axis corresponds to the reward to these factors.
 Price effect vs. market size effect and their relation to the elasticity of substitution (i.e.
factors as gross complements or substitutes) and state dependence (Marleen)
Market (L,Z) and price (P ,P ) effects are about factors.

L Z
Price effect: scarcity increases the price. Standard relation: being scarce -> higher rewards. In
the normal case we expect to go from A to B. But instead it goes to point C or even D. this is
because the technical change is biased towards higher rewards.
Factor abundance: market size. Market size effect example:
Skilled worker (shoemakers) vs unskilled (factory workers). Industrialization needed more
unskilled labour in the factories. They invested in factory machineries which substituted
skilled workers (shoemakers) with 10 unskilled (factory workers) who did different tasks in
the factory.
 difference between the elasticity of substitution of factors and the elasticity of

substitution of goods (Nicolas)
Elasticity of substitution of factors is represented by sigma. Elasticity of substitution: How

much we can substitute between two factors. When elasticity changes this dynamic changes.
σ ∈ (0, ∞): elasticity of substitution between the two factors.
If σ = ∞: perfect substitutes, linear y. If σ = 1, Cobb-Douglas y. If σ = 0, no substitution,

Leontieff y.
In this production function, sigma determines the elasticity of substitution. When σ > 1,
factors are gross substitutes and when σ < 1, they are gross complements. When sigma is low,
L and Z are gross complements. For example, imagine scientists and their computers in a
firm. You can’t replace computers with scientists. Each scientist needs one computer. Like
Left and right shoes, you need both.
With a high sigma you need more substitution. What would be the future of one tech in one
industry depends on the availability of its complement in that industry. This substitutability
also depends on technical change. Like in Cobb Douglas function. In the end, technical
change defines which factor (L/Z) plays an important role.
Complementarity is between the factors of production. In this framework, price effect is more
important with high complementary because we need both factors. We need labour and
skilled workers and increasing the productivity depends on both of them. When the scarce
factor (Z: skilled worker) becomes more expensive then you need to invest in Az more to
improve it.
ε is the elasticity of substitution between two goods, Y and Y

L Z.
 Factor-augmenting vs. factor-biased technical change.
A is L-augmenting (labour complementary) and A is Z-augmenting technical change. A and

L Z L
A are Factor-augmenting.
Z
Factor-biased technical change: : technical change is L-biased if it

increases the marginal product of L more than that of Z and is Z-biased if it increases the
marginal product of Z more than that of L.
 Demand vs. supply drivers of directed technical change
In the supply side tech monopolists tend to maximize their profit. Here R&D has direct
relation with machines.
The equilibrium is given by equation 20. which equalizes both sides. L

side and Z side.
show how it relates to elasticity (sigma) factor and

abundance Z/L.
Here sigma determines what will be the reward and

this determines the slope of figure 2. W /W is the return to z over return to L. Here we can
Z L
see that factor of abundance and technical change direction depend on sigma. From the
producers’ side, it is the cost of different factors.
change of shares in the economy.
 What does Z represent? (Jasper)

. Z can be land, capital, or skill worker
 Description and role of state dependence (Marleen)
. How much new knowledge (Technology) depends on the previous knowledge

(Technology). Countries and industries are building on the previous knowledge to go
forward. You always use the current knowledge on the subjects and literature to create new
ones and innovate. Radical knowledge that is built from the scratch is happening on rare
occasions. It’s also empirically plausible.
R&D production. Need to consider the investment in there and also the input for it.
What is delta: spillovers between now and future.
 Discuss eq. 14 (Marleen) and 20 (Mastaneh)
.eq. 14: This is the profit

of tech monopolists and higher V in each factor creates incentive to produce those types of
machines. The price effect (P ,P ) and the market size effect (L,Z) encourages innovation in
L Z
that direction.
Eq. 20 is explained above.
 Explain N dot (Mastaneh)
. N is the variety of machines and N dot is its growth.
 This paper only implicitly relates N_z to A_z and N_L to A_L. Are they the same or
directly connected (they should be the same)? (Mastaneh)
. not really clear here. N_z and N_L are variety of machines for each factor which affect the
share of skills. Depends on investment too.
. A_z and A_L are the productivity of each factor. Depends on these machines.
Limitations
 Assumption that R&D decisions are driven by profits (Jasper, Simone)

 Assumptions of no international trade and no intellectual property rights (Simone)
Questions
1. What element, according to Acemoglu, is the endogenous literature missing to explain

the process of technical change? What drives income inequality across countries
according to the framework presented here?
o Link to Verspagen model? (Simone)
The setup of this paper and Verspagen paper is the same. The North makes more innovation
and the South needs to catch up.
Here we have technical change bias. The problem is that in the North there are many skilled
workers and in the South there are not enough skills to adapt the innovation which has been
produced in the North. Therefore, the imported innovation and machineries may not be fully
operative.
There is a mismatch between this technology and local ability of workers. The constraint is
the number of skilled workers they have which is obviously not enough. Also, elasticity of
substitution plays an important role. The lower is the elasticity of substitution factor, the
harder it is to substitute skilled workers with labour.
2. Link to Hausman and Hidalgo: developed countries produce very broadly, high and
low skilled goods and everything that they can. Does that not contradict the fact that
LDC countries could just get the labour intensive/low skilled innovations from the
north countries? (Insa)
. countries should diversify by looking and choosing the different tech that fit their current
situation, and in this way benefit from the new technology the most.
3. The model by Acemoglu can also be used to understand income inequality within
countries (across categories of workers with different skills). Explain the concept of
skill biased technical change and how it can affect income inequality as measured by
the ratio of wages of the different categories of workers.
Factors that are more in demand (Labour L or skilled workers Z), and the returns to them is
defined by: The overall effect of factor

abundance on factor rewards depends on the elasticity of substitution. If σ is sufficiently large
(σ > 2), the relationship between relative factor supplies and relative factor rewards can be
upward sloping and technology is endogenously biased towards skilled workers. This
increases inequality within countries, as skilled workers’ rewards become larger.
4. Section 5.3 discusses the impact of trade on inequality according to this framework.
Compare the mechanisms put forward by the standard trade theory (in particular the
Hecksher-Ohlin model of relative factor abundance and factor prices) and those due to
skill-biased technical change.
.Trade creates competition and as a result increases the prices. Because skill-intensive goods
are more scarce in the world than in the North: As price and market size are two
factors that shape technical change, this will change it. Also this encourages innovation for
the scarce factor (skill).
Traditionally, when you have abundance you have advantage because of lower prices and you
export those products.
Trade opening increases skill premium pz/pl.
Increase in the skill premium in the North:

Trade opening could induce skill-biased technical change and increase wage inequality more
than predicted by standard trade theory, within countries but also globally. Yet, this
conclusion is obtained only when skilled and unskilled workers are gross substitutes. Also,
Market size impact on skill premium depends on which factor increases.
Winners in this framework are the ones who are employed in sectors that trade. Some sectors
win and some loose but also inequality rises within sectors between skilled and unskilled
workers.
5. How can policymakers use the implications of this framework according to the article
by The Economist and the NPR interview? Use a policy issue of your choice to
provide an example.
 Role of vested interests in blocking change (electric cars - Jasper)
One solution is internalizing the externalities of costs. When there are not monetary
incentives to push industries towards greener activities maybe there is a role for the
government to interfere with putting rules, regulations, and subsidies in place. Efficient
decarbonisation requires subsidies for clean-energy research, as well as a carbon price.
Another solution is about labour and unemployment. Clever machines could replace human
workers—or might instead be engineered to assist human labour. For example, they can help
people navigate complicated processes or take difficult decisions. We can direct technical
change to favour labour-assisting rather than labour-displacing. For example, invest in the
solutions that help scientists to work more efficiently and find better complements.
The Economist (2020): Free Exchange. Economists explore the consequences of steering
technological progress
Efficient decarbonisation might thus require subsidies for clean-energy research, as well as a
carbon price. Indeed, efforts to slow global warming represent a massive attempt to realise
one technological future—a zero-carbon version—rather than another.
Clever machines could indeed replace human workers—or might instead be engineered to
assist human labour: to help people navigate complicated processes or take difficult
decisions. directing technical change to favour labour-assisting rather than labour-displacing
forms of AI could be a second-best way to manage progress, if governments cannot
sufficiently redistribute the gains from automation from winners to losers.
NPR Radio, Planet Money podcast (2020), Small changes
1870-1940: Electricity, combustion engines changed everything. Very fast
1950-2020: only computers, AI, robots
Productivity growth boosts in 90s because of computers. And in 2004 crashed.
Productivity paradox: all tech doesn’t make us more productive. Tech and robots should have
increased productivity and decreased jobs but they didn’t.
Next ten years: similar to 10 past years.
M5: Note: Before reading the article for today, start by reading the box below which presents
the concept of routine-task intensity from Autor and Dorn (2013). The short readings offer a
recent evaluation of job polarization in the recent years (Voxeu, 2020) and the differential
impact of COVID across occupations (The Economist, 2020).
Box: Routine Task Intensity (RTI) Autor and Dorn (2013) 1
“Technological progress in our model takes the form of an ongoing decline in the cost of
computerizing routine tasks, which can be performed both by computer capital and low-
skill (“noncollege”) workers in the production of goods. The adoption of computers
substitutes for low-skill workers performing routine tasks—such as bookkeeping, clerical
work, and repetitive production and monitoring activities—which are readily computerized
because they follow precise, well-defined procedures. Importantly, occupations intensive in

these tasks are most commonplace in the middle of the occupational skill and wage
distribution.
The secularly falling price of accomplishing routine tasks using computer capital
complements the “abstract” creative, problem-solving, and coordination tasks performed by
highly-educated workers such as professionals and managers, for whom data analysis is an
input into production. Critically, automation of routine tasks neither directly substitutes for
nor complements the core jobs tasks of low education occupations—service occupations in
particular—that rely heavily on “manual” tasks such as physical dexterity and flexible
interpersonal communication. Consequently, as computerization erodes the wage paid to
routine tasks in the model, low-skill workers reallocate their labor supply to service
occupations.
Specifically, it predicts that markets that were historically specialized in routine task-
intensive industries should differentially
(i) adopt computer technology and displace workers from routine task-intensive occupations;
(ii) undergo employment polarization as low-skill labor reallocates into manual task-
intensive in-person services;
(iii) exhibit larger (nominal) wage growth at both ends of the occupational skill distribution
(i.e., wage polarization); and
(iv) experience larger net inflows of workers with both very high and very low education,
driven by rising demand for both abstract labor in goods production and manual labor in
service production.»
“Explaining Job Polarization: Routine-Biased Technological Change and Offshoring” - Goos

et al. (2014)
Summary:
The “Skill-Biased Technological Change” hypothesis (SBTC) demonstrates that demand is

shifting in favor of more educated workers, but it cannot explain the job polarization which is
pervasive across advanced economies.
MAIN POINTS:
 Recent technological change is biased toward replacing labor in routine tasks

(routine-biased technological change (RBTC))
 There is task offshoring partially because of TC.
 Both of these forces decrease the demand for middling relative to high-skilled and
low-skilled occupations.
 Within each industry there is a shift away from routine occupations leading to within-
industry job polarization.
 RBTC leads to significant between-industry shifts in the structure of employment. 1.
It reduces the employment/output ratio. 2. It reduces costs and output prices in
routine tasks intensive industries and increase demand for their products.
Output in different industries is produced from a set of tasks, and each task is produced
using a technology that combines labor from a specific occupation and other inputs (like
computers or offshored labour). To capture RBTC and offshoring, the cost of these other
inputs changes over time according to the routineness and offshorability of a task.
Framework ηκ∂γβεξμτ
A. The Production of Goods

1: CES production function:
i: industry, T: tasks, η: elasticity of substitution, β: intensity of the use of task j in industry i
cost function for producing Yi :
cTj: unit cost of task j, cIi (cT1,..., cTj ,..., cTJ ): industry marginal cost.
2: demand for task j conditional on industry output Y:
tij(cT1,..., cTj ,..., cTJ ): demand for task j to produce one unit of good i.
B. The Production of Tasks
3: total production of task j:
Nij: domestic labor of occupation j in industry i, Kij: other input
cost function for producing Tij: wj and rj the prices of
Nij and Kij respectively
4: demand for occupation j conditional on task output Tij:
nj(wj rj) is the demand for occupation j to produce one unit of task j.
5: change in costs of the other inputs: Rj: routineness, Fj: the

offshorability. R and F are increasing => both γR&F <0
6: log demand for occupation j in industry i conditional on industry output and marginal costs
(+ time & country subscripts):
This models occupational wages by a set of country, occupation, and time dummies and
industry output and marginal costs by industry-country-year dummies
If η < 1,γR < 0 and γF < 0 => [1 − η][1 − κ][γR Rj + γF Fj]<0 => more routine and
offshorable occupations (increasing R and F) causes job polarization within each industry.
C. The Demand for Goods
7: log demand for industry output: Pict: the

industry-country-year specific price indices relative to a country-year aggregate price index
In case of monopolist competitors:
log Pict = log μ + log cictI. μ > 1: price mark-up
 8:
IV. Explaining Job Polarization within and between Industries
9: share of occupation j in total employment at time t: average of shares

across different industries. τit is the share of employment in industry i in total employment at
time t .
10: Differentiating 9: [within industry, between

industry]
11: within industry:
: average of routineness in industry i, weight is the share of different

occupations
12: between industry: Ragg: average of RIit

across industries.
13: finally, shift-share decomposition:
, {1. within: shift away from or

toward occupation j within industries by subtracting from Rj the average routineness across
industries in which occupation j is employed}
si | jt the share of occupation j in industry i at time t.

Between: RBTC will typically cause less routine employment to be used in the production of
a given level of output, so differences in routineness across industries will cause industry
employment shares to change even if industry output shares do not.
ε > 0: (ε from eq.7) routine intensive industries will see a larger fall in industry costs and
therefore relative output prices. This will increase the demand for routine intensive goods and
therefore the demand for all occupations used in routine intensive industries.
1.
Voxeu (2020), “The polarisation
myth: Europe’s job structure is upgrading”, by
Daniel Oesch, Giorgio Piccitto,
empirical evidence against the polarisation theory in Western Europe
globalisation shifted labour-intensive mass production from the North to the South, and
where educational expansion massively augmented mid- and highly qualified labour
supply.
Categories: income, education and occupation classes. The changes are in order for highest,
midst, lowest in all categories.
polarisation in the US and UK may have more to do with their educational systems, wage-
setting institutions, and migration policies than technological change. the labour market
opportunities expanded for the salaried (upper-)middle class. On the contrary, the core of the
traditional working class, as well as subordinate white-collar employees, lost ground.
Advanced economies continue to be most successful in the automation and offshoring of
low-paid, low-skilled, and low-status occupations such as farmworkers and assemblers,
data-entry clerks, and sales assistants. In parallel, job expansion is most vigorous in the
occupations of the top quintile, among managers and professionals.
This also means that technological change continues to be skill-biased. What may not be
fully appreciated in labour economics is that the least-skilled jobs also tend to be the jobs
mostly strongly composed of routine tasks. Recent research clearly shows that the more
routine an occupation is, the lower the skill requirements are.
Universities and technical colleges were not only sending out highly educated workers in
greater numbers as less-qualified older cohorts went into retirement; luckily, the economy
was also creating more jobs in occupations requiring higher education.
Questions
 What does the concept of Routine-Biased Technical Change (RBTC) help explain that
the framework of Skill-Biased Technical Change (or directed technical change)
discussed in meeting 4 can’t? (i.e. what is the empirical motivation for the RBTC
framework)
*The “Skill-Biased Technological Change” hypothesis (SBTC) demonstrates that demand is

shifting in favor of more educated workers, but it cannot explain the job polarization which is
pervasive across advanced economies. 16 Western European countries over the period 1993–
2010.
There is different amount of routineness in all countries, more between developing and
developed countries. Because of level of tech in different tech.
 In which ways does RBTC and task offshoring overlap, and in which ways do they
not?
*When routine tasks are replaced by technology and automation in another country, you have
both offshoring and RBTC. Offshoring the routine tasks of a production line.
Both routine and offshorability.
Offshore depends on tradability. Assembly can be offshored, can be shipped back. or

Costomer assistance.
But routineness depends on the quality of tasks. Or split the task between smaller tasks and
which one can be
Complex tasks can be divided by low complex tasks that can be complemented by capital (for
example by software). Some complex can be offshored like computer scientists or even
R&D.
 Explain the implications of RBTC for within- and for between- industry job
polarization.
*Within each industry there is a shift away from routine occupations leading to within-
industry job polarization.
*RBTC leads to significant between-industry shifts in the structure of employment. 1. It

reduces the employment/output ratio. 2. It reduces costs and output prices in routine
tasks intensive industries and increase demand for their products.
 Based on the short readings, what are recent trends concerning job polarization, and
do these still align with the RBTC framework? How should we expect COVID-19 to
impact different types of occupations?
* the labour market opportunities expanded for the salaried (upper-)middle class. On the
contrary, the core of the traditional working class, as well as subordinate white-collar
employees, lost ground. Advanced economies continue to be most successful in the
automation and offshoring of low-paid, low-skilled, and low-status occupations such as
farmworkers and assemblers, data-entry clerks, and sales assistants. In parallel, job expansion
is most vigorous in the occupations of the top quintile, among managers and professionals.
Demand for occupation and university: if there is a mismatch it can be solved by migration.
How about developing countries: lower substitution with capital (capital limitation) and
high skills move and migrate (brain drained). Due to Offshoring, they need more labor in
routine intense tasks. Because of multinationals and FDI. Also, it Pushes the wages above
too. In India for example they invest computer science parts.
Normalize: (-mean)/standard deviation. Having the same units and comparable.
Consumer demand: impact of RTA and offshoring, can change the share of on industry but
here they did not consider that. Here that is only driven by price.
The Economist (2020), “Unequal protection. American inequality meets covid- 19”, April 18th.
Great Recession increased the already large divide between families at the top and bottom of
the income distribution.”
M6: Note. Here you should start with the interview of David Autor to get a sense of the topic
of today, which relates to the impact of Chinese exports on advanced economies’
employment after its accession to the WTO in 2001, labeled the “China Shock”. Then read
the article by Autor (2013) which shows the impact on the US economy, and finally the short
article by Branstetter et al. (2019) on VoxEU covering the impact on a European country,
Portugal.
The China syndrome: Local labor market effects of import competition in the
United States - Autor et al. (2013)
Summary:
This article analyses the impact of Chinese import competition between 1990 and 2007 on
US local labor markets considering cross-market variation in import exposure stemming
from initial differences in industry specialization, instrumenting for US imports using
changes in Chinese imports by other high-income countries.
Main results:
- Rising imports cause higher unemployment, lower labor force participation, and
reduced wages in local labor markets that house import- competing manufacturing
industries.
- Import competition explains one-quarter of the contemporaneous aggregate decline

in US manufacturing employment.
- Transfer benefits payments for unemployment, disability, retirement, and
healthcare also rise sharply in more trade-exposed labor markets.
Commuting zones (CZs): geographic units for defining local labor markets, differ in their
exposure to import competition as a result of regional variation in the importance of different
manufacturing industries for local employment.
Authors relate changes in exposure to low-income-country imports to changes in CZ

wages, employment levels, industry employment shares, unemployment and labor force
participation rates, and take-up of unemployment, disability, welfare, and other publicly
funded benefits, where they allow impacts to vary by age, gender, and education. This
approach also captures net effects on geographic mobility, and take-up of public transfer
benefits in the surrounding geographic area.
industry or occupation as the unit , Mobility is lowest for noncollege worker
Social Security Disability Insurance (SSDI), implicitly insure US workers against trade-
related employment shocks.
Trade Adjustment Assistance (TAA), which is the primary federal program that provides
financial support to workers who lose their jobs as a result of foreign trade.
Framework:
The growth in US imports from China affects the demand for goods produced by US regional
economies. (demand shocks = exposure to import competition)
Region i, produces both traded goods and a homogeneous non- traded good (leisure)
change in wage (W^i), change in employment in traded goods (L^Ti), change in employment in
non-traded goods (L^Ni),
China affect on region I’s wages and employment:

1. Import-Demand, increased demand for goods in China: change in expenditure in

China on each industry j (E^Cj), exogenous
2. Export-supply, increased competition in the markets in which region i sells its output:
change in China’s export-supply capability in each industry j (A^Cj , exogenous), a

function of changes in labor costs, trade costs, and the number of product varieties
made in China
1:
share of output by region i that is shipped to China (θijC ≡ XijC/Xij)
initial share of output by region i that is shipped to each market k : (θijk ≡ Xijk/Xij)
initial share of imports from China in total purchases by each market k : (φCjk ≡ MkjC/Ekj)
initial ratio of employment in industry j to total employment in non-traded or traded

industries (Lij/LMi, M = N,T)
general-equilibrium scaling factor (cij > 0)
ρi, the share of the current-account deficit or trade imbalance in total expenditure in region i .
ρi ≠ 0: trade imbalance. ρi = 0: export-supply and import-demand offset each other, labour

only moves between the tradable goods sectors.
Assumption: (ρi cij = α)
focusing on: greater import competition in the US market, thus ignoring the effects of greater
US exports to China or greater import competition in the foreign markets that US regions
serve.
2:
3: import exposure variable (Chinese imports per worker):
Lit :start of period employment (year t)
ΔMucjt : observed change in US imports from China in industry j
To identify the supply-driven component of Chinese imports, authors instrument for

growth in Chinese imports to the United States using the contemporaneous composition and
growth of Chinese imports in eight other developed countries. Instrument: non-US exposure
variable: ΔIPWoit
4: 10 year lag in calculating the instrument to see the impact.

Captures China’s rising comparative advantage and falling trade costs.
OLS and 2SLS results impact of trade shocks on regional employment in manufacturing:
5: include the instrument ΔIPWoit
ΔLit m : decadal change in the manufacturing employment share of the working-age

population in commuting zone i. γt : time dummies for each decade, vector Xit : controls
Table 2 column 1-3: causality, 4-6: reverse causality (that poor manufacturing productivity
and employment causes more exposure)
Table 3: uses different controls including routineness and offshorability.
Choosing 2sls: OLS is subject to both measurement error in CZ employment levels and
simultaneity associated with US industry import demand shocks.
Table 4 (Trade Shocks and Local Labor Markets Beyond Manufacturing): import shocks
impact on local manufacturing cause reallocation of workers across CZs. dependent variable
is the log of the working-age population ages 16 through 64 in the CZ,
 These estimates suggest that the effect of trade exposure shocks on population flows
is small,
Table 5: dependent variable the share of the non-elderly adult population in each
(employment situation) category:
 declines in the population share in one category yield equivalent gains in other
Table 6 (Impact on wage (wage as dependent variable)): exposure has large, negative,
significant impact, both for men and women.
Table 7: impact on manufacturing, both on log employment counts (reduces) and wages (no
significant impact). The latter is maybe because: 1. the most productive workers retain their
jobs in manufacturing, thus biasing the estimates against finding a reduction in manufacturing
wages. 2. plants react to import competition by accelerating technological and organizational
innovations that increase productivity and may raise wages.
impact on nonmanufacturing, both on log employment counts (no significant impact) and
wages (reduces). A negative shock to local manufacturing reduces the demand for local non-
traded services while increasing the available supply of workers, creating downward pressure
on wages in the sector.
total CZ’s employment and wages falls => demand for public transfer payments rises, table 8
exposure can cause reductions in household income (large and significant impact) and
therefore consumption, table 9. It appears unlikely that the increase in households’ transfer
benefits comes anywhere close to offsetting the substantial decline in earnings.
Alternative measures of trade exposure: including Exports (to include competition in other
foreign markets) and the Factor Content of Trade
total exposure of region i to imports from China:

growth in third markets’ imports from China (ΔMocjt) , share of spending in these markets on
US produced goods (Xoujt/Xojt),(table 10)
In panel B coefficients are smaller in absolute value, consistent with the scaling up of import
exposure.
panel C measures industry import exposure using total China imports per worker less China
imports of intermediate inputs per worker. Because, if trade with China increases the variety
of inputs to which US producers have access, it raises their productivity and increases their
demand for labor and partially offsetting the impact of import competition in final goods.
Panel D: China is often the final link in the supply chain owing to its comparative advantage
in labor-intensive assembly, which tends to be the last stage of production, this is not true for
US.
net imports from China (US imports - US exports):

Panel E: gravity measure (captures changes in the productivity or transport costs of Chinese
producers relative to US producers) gravity : you trade more with nearer countries, because
of transport cost.
In panel F they replace the change in imports per worker with the change in the net import of
effective labor services
̃ E uj0 : direct plus indirect employmet in an industry
6: marginal utility of the consumption afforded by an hour of labor
marginal disutility of work
 workers work if only left hand side of eq.6 is larger
optimal hours choice (h0), wage (w0), income loss because of risk aversion(uc), uc(y + w0
h0, h0) = u0c
inverse compensated hours elasticity of labor supply:
7: some workers reduce work hours and some force to leave jobs,
worker surplus: A higher labor supply elasticity

implies that workers gain less surplus from employment since the wage demanded for an additional
hour of labor is not much above the wage paid for the prior hour.
8: welfare loss from involuntary employment:

new market wage (w′0 , w′0 < w0 ), associated hours choice h′0 ≈ h0(1 + ηh ln(w′0/w0)).
 Rising China trade exposure increases both involuntary unemployment and

nonparticipation
Trade nationwide benefits: lower price and more variety of goods for consumers and
industries. Triggering to invest in innovation, contributing to productivity growth.
Exposure to Chinese import competition affects: reduce in manufacturing employment , drop

in wages that is primarily observed outside of the manufacturing sector, drop in the average
earnings of households, rising transfer payments including federal disability, retirement, and
in-kind medical payments.
Interview with David Autor explaining the China shock, IFS, 2017:
Trade +: raising GDP, specialize in comparative advantage, cheap/variety of goods, faster

product innovation (outsource skill economies)
China trade: 400 m Chinese out of poverty, created wealth in center and south America,
commodity boom, invest in Sub Saharan Africa => reduced inequality.
_: individual in sectors that are exposed will lose jobs (routine intensive sector)
*impact of Chinese exports on advanced economies’ _e_m_p_l_o_y_m_e_n_t_ _after its

accession to the WTO in 2001, labeled the “C_h_i_n_a_ _S_h_o_c_k_”.
1991: 0.25, Chinese goods in the us
5%: 2007: Chinese goods in the us
Job loss in manufacturing, specially labour intensive and the lines that china can compete
with like shoes textile, tec. It also made it more difficult to return to job or find another job
because of offshoring the labour.
Economic decline. Free trade generally increases GDP. Benefits are more spread like good
prices decline and variety, defused and broadly shared, faster rate of product innovation,
specialization in the things a country good at.
But the ones exposed to competition will suffer. Their industry shrinks. Problem with china is
low prices, so no country could compete.
+ This shock was good not only for china that 400 million people came out of poverty, but
also for the rest of the world, china invested in sub Saharan countries, caused commodity
boom, created wealth for every country. Reduced inequality,
Automation: output rises, safe labour, steady trend. 70 m factory jobs after WWII and 90m in
1999, because automation. 2000- 2011 of which 30% lost, because of china.
Not only in the us but also in many European countries like the uk, it caused polarization or
even move to the right.
Policy for labour in the us: training, wage rises, job search assistance.
China gain access to foreign technologies, capital goods, and intermediate inputs,
multinationals, WTO.
Between 1992 and 2007, China accounted for three quarters of the worldwide growth in
manufacturing value added that occurred in low- and middle-income nations.
Routine-intensive occupations are a set of jobs whose primary activities follow a set of
precisely prescribed rules and procedures that make them readily subject to com-
puterization. This category includes white collar positions whose primary job tasks involve
routine information processing (e.g., accountants and secretaries) and blue collar production
occupations that primarily involve repetitive motion and monitoring tasks.
o VoxEU (2019), “The China Shock and employment in Portuguese firms: The role of
labour market regulations”, by Lee Branstetter, Brian Kovak, Jackie Mauro,
import share of China in Portugal increased from 0.5% to 2% during 1995-2007
impact of rising Chinese exports on Portuguese employment, finding that labour market
effects are shaped by indirect competition and labour market regulation.
positive effect in the German labour market. The authors argue that German imports of
intermediate inputs from China displaced imports from other low-wage exporters, such as
Portugal.
Portugal had the second most restrictive labour market regime in the OECD
Alongside these quite rigid regular employee contracts, Portuguese employment law allows
more flexible temporary contracts,
the share of jobs in temporary contracts increased from 10% in 1995 to 22% in 2007.
a very large share of Portuguese manufacturing activity was driven by exporting.
Portugal’s competitive position diminished as the nation moved to adopt the euro. This loss
of Portuguese export competitiveness coincided with the beginning of a boom in Chinese
exports to Western Europe.
Portuguese firms faced considerable pressure from rising Chinese imports in their key
European export markets.
Questions
1. Explain the identification strategy used by Autor to estimate the causal impact of
Chinese imports on US employment.
First regression (equation 3 and 4) you regress the change of the import exposure of the US
on the change of the import exposure of the eight other developing countries. This gives you
predicted values for the import exposure of the US without common effects that affected all
countries in the same way.
Second regression (equation 5), you regress the change in the manufacturing employment
share on the predicted values for the change in the import exposure of the US. Then you will
get estimates which are only due to the supply side of China because all common factors
were already extracted in the first stage (for example general demand side effects).
2. The recent study by Branstetter et al. (2019) on the case of Portugal complements
previous research on Germany (Dauth et al. 2014, 2017, 20182). What are the
characteristics that may matter in explaining differential impacts of the China shock
across countries? Is there a “European effect” versus a “US effect”?
Rigorous labour law with long term occupational contracts: If labour institution regulations
don`t allow to easily hire and fire people, firms are more likely to go bankrupt. Adjustment
mechanism would then be the exit of firms.
Where do they compete with China? Core of EU market.
Why did they in this paper not look into export competition? Example paper about Germany,
it is the type of links that is important. The US might be harmed when you only look to
producer and not consumer especially in a trade war.
US current account deficit (Question Jasper):
China funds a lot of US debt, can the shock of China therefore also be explained in this
way? This can create a sort of dependence and increasing power on the side of China.
3. Explain why the results in this paper can “contribute to public ambivalence toward
globalization and specific anxiety about increasing trade with China” (Autor, 2013, p.
2159, last sentence).
Is it relevant what happens in the US, threat to external validity? It is somewhere important
because of increasing political consequences for a special part of the labour force in the US.
But also when wages and employment go down then there is an assumption of unfair
competition even if the aggregate effect is still positive (for example when consumer effects
are integrated). Overall Welfare gains are difficult to measure, but it seems to be that the loss
is only a small part of the whole picture. Regarding total Welfare this paper misses a lot of
information.
Policy recommendation: Allocation of gains/losses is important.
Lower prices for consumer as a gain? How do you evaluate Welfare? For example, no
measure for well - being (unemployed experienced loss of recognition, health problems, etc.).
Individuals are often more risk averse and don`t want to have too many changes in their live.
M7: This session is a general introduction to the economics of climate change, focusing on
the welfare and distributional impacts of rising temperatures (Tol, 2018), and on the
economic impact of climate change damages, and in particular why it matters to focus on
extreme events (Coronese et al. 2018).
Tol (2018) presents quite conservative estimates, concluding that “the impact of climate
change on the economy and human welfare is likely to be limited” (p. 16), as “a century of
climate change is likely to be no worse than losing a decade of economic growth” (p. 8).
Instead, Coronese et al. (2018) warn about how misleading it may be to look at average
effects when the distribution of climate shocks have fat tails: “fat tails can dramatically
change policy implications in a variety of climate-economics models”.
We will discuss here issues related to the measurement and assessment of economic impacts
of climate changes. This assessment will be essential to our discussion in meeting 8 of the
policy response to climate change, and in particular the way to foster a transition to cleaner
technologies. Finally in session 9 we will focus on the role of trade policy in mitigating or
accelerating climate change.
The economic impacts of climate change – Tol (2018)
Summary:
The author believes that a century of climate change is likely to be no worse than losing a
decade of economic growth.
Carbon price :greenhouse gas (GHG) emission should be taxed.
This paper investigates economic impacts of climate change and the distribution of those
impacts around the world by reviewing of the estimates from different studies.
The paper concludes that the total economic impacts of climate change are negative, but
modest on average, and that the severe impacts on less developed countries are caused
primarily by poverty.
This graph shows the welfare-equivalent income change as a function of the increase in the
global annual mean surface air temperature since preindustrial times. Dots are the estimates
from different studies and dotted lines indicate the 95 percent confidence interval. Because of
the slow workings of the climate system and the long-lived capital in the energy sector, it is
likely that a warming of 2C cannot be avoided.
 The welfare impacts of initial warming are positive on net (for example to those who
depend on rain-fed agriculture (as carbon dioxide fertilization makes plants more
drought resistant) and those who spend substantial money on heating), while further
warming will lead to net damages. Hence, the GHG emissions should be taxed, not
subsidized
 The graph is right skewed: negative surprises are more likely than positive surprises
of similar magnitude. For example, nonlinearity of the impact (exponential and higher
impact than anticipated) is possible.
There is uncertainties and asymmetries because:
 natural scientists and economists tend to disagree about the seriousness of climate
change
 not enough attention to this impact on water resources, transport, migration, violent
conflict, energy supply, space cooling, labor productivity, and tourism and recreation
=> incomplete estimates of the impact
 Poorer, hotter, and lower-lying countries are notably more vulnerable to climate
change than others.
 Developing countries are more vulnerable due to:

o Being more exposed to the weather because of the important role of

agriculture and water resources in the economy. Richer countries have a larger
share of their economic activities in manufacturing and services which is
shielded from climate change.
o Poorer countries tend to be in hotter places. new technologies will have to be

developed and behavior will have to be adjusted by trial and error.
o Poorer countries tend to have a limited adaptive capacity (access to modern

technology and institutions that can help protect against the weather, lack of
ability, and political will)
Two solutions for poor countries: reduce poverty or reduce climate change
Poverty and vulnerability to climate change examples:
- No coastal protection in Bangladesh because of corruption and poor government
- Crop yield gap in Africa because of lack of access to irrigation, high-quality seeds,
and pesticides (underlying reason: lack of access to capital and product markets due
to poor roads and insecure land tenure) solution: modernizing the agriculture.
- Higher spread of malaria in hot weather. Solution: Investments in insecticides, bed

nets, and vaccine development
 Concentrating GHG emissions reductions in rich countries will not solve the climate
problem, while slowing economic growth in poor countries to reduce climate change
may do more harm than good.
Cheap and abundant energy fuelled the industrial revolution, and a lack of (reliable)
electricity retards growth in poor countries. Energy poverty alleviation (coal or other fuels)
and carbon dioxide emission reduction may be contradictory goals. => development should
be a complementary strategy to GHG emissions reduction
Barriers to international trade and labor migration suggest a disregard for the poor in other
countries. The aid, trade, and migration policies need reform.
Impact on economic growth:
Climate change affects the size and productivity of the labor force and the capital stock,
which affects investment and hence future output. (higher impact in poor countries)
 trap more people in poverty.
Evidence for sharp increase in the economic damages of extreme natural disasters -
Coronese et al. (2019) *
Summary:
Climate change has increased the frequency and intensity of natural disasters => increased
economic damages ? a temporal increase in extreme damages
an increasing trend in extreme damages from natural disasters, evidence for a rightward skewing and tail fattening of the
distributions is statistically significant and robust .
pattern is strongest in temperate regions, suggesting that the prevalence of devastat- ing natural disasters has broadened
beyond tropical regions and that adaptation measures in the latter have had some mitigating effects on damages.
We analyze event-level data using quantile regressions to capture patterns in the damage
distribution (not just its mean) and find strong evidence of progressive rightward skewing
and tail- fattening over time. Effects of time on extreme damages are large, statistically sig-
nificant, and growing with increasing percentiles.
the risk of extreme damages has increased more in temperate areas than in tropical ones.
Damage Function : Damages of natural disasters (frequency and intensity) over Stressor
(time)
Normalization: control variables for socio-demographic factors as covariates in ther models
alongside time
characterize the behavior of the damage distribution fitting quantile regressions (dividing a
probability distribution into areas of equal probability)
Our approach avoids 2 common pitfalls: 1) linear aggrega- tion—i.e., summing damages
associated to disasters occurring in a given year over a specified geographical area, which
may lead to a substantial loss of information—and 2) the use of ordinary least squares (OLS)
—i.e., mean regression, which captures only average trends in damages (changes in
expected losses) (17, 18). With increasing evidence that natural disasters induce fat-tailed
damage distributions (19) and that fat tails can dramatically change policy implications in a
variety of climate-economics models (20), analyzing quantiles can be an effective way to
inspect extreme, low-probability events. In addition, OLS regression can be a rather blunt
instrument to analyze skewed data.
We hypothesize that what changes over time is the right skew and tail behavior (as opposed
to the average) of the damage distribution.
robust evidence of mounting economic impacts, mostly driven by changes in the right tail of
the damage distribution—that is, by major disasters. This points to a growing need for
climate risk management.
ased on such a shape, a simple shift in the distribution of the underlying stressor translates
into a rightward skewing and tail fattening(upper percentiles ) of the damage distribution
(larger damages).
Dai = α + βti + γGDPc(li ),ti + θxi,ti ,li .
This formulation disentangles a pure time trend from one whose magnitude is modulated by
the wealth at risk in the affected area
The change in the mean is small (and statistically nonsignificant at 5% level), while upper
percentiles have strong, positive, and statistically significant time trends => the economic
impacts of natural disasters are indeed growing, but not at all scales.
most of the loss dynamics occurs in the right tail of the damage distributions. A: the box plot
shows the percentiles of the distribution. While the boxes increase in size, indicating an
increase in the median and 75th percentile, the increase in the 99th percentile is much
larger. This suggests a much higher volatility
right skewed, but less so than economic damages, and instead of fat tails, they present
extremely large isolated outliers . casualties display a discernible downward trend over time .
4B, the trend is negative and statistically significant for the upper percentiles
in recent decades, extreme droughts, storms, and extreme floods have become less fatal, but
only in rich countries=> increasing polarization between poor and rich
extreme temperature events have become more deadly in poor and rich countries alike
implications:
public disaster risk management and the insurance industry may face increasingly large economic losses.
adaptation efforts may be critical in temperate (not only tropical) areas. Third, if part of the increases in the frequency and
strength of natural disasters is attributable to climate change, mitigation is a logical instrument to reduce trends in damages.
From a method- ological perspective, we find empirical support for the use of a convex, upwardly curved damage function in
integrated climate- economics models (see also 30) and for the importance of tail risks
The Economist (2015), “Free exchange, Putting Goldilocks to work”,
higher temperatures did not seem to sap growth in rich countries, but did in poor ones.
There is one optimal temperature which boosts the productivity

If nothing is done to stop global warming, the world will see an 83% increase in electricity
consumption between 2010 and 2100, due simply to greater use of air conditioning, fans and
refrigeration.
Questions
1. What are the main channels through which climate change (and temperature change) might
(positively or negatively) affect economic outcomes according to the two papers and the
article by The Economist?
 Climate change is not necessarily bad for economies according to some studies;
some cold countries may be more productive at a slightly warmer climate; for
instance, less heating and possible benefits to agriculture through Co2 fertilization
 However, for higher increases of average temperature, the volatility of climate
change also increases, reflected in figure 1 in Tol (2018)
 Negative channels include pollution, lower productivity in hotter weather, and
physical damages to assets through flooding, rising sea levels, tornadoes and other
extreme weather events
 human losses have a detrimental economic impact, as well as being tragic from a
humanitarian point of view
2. Why, according to Tol (2018), can climate policies have perverse effects in the case of
developing economies?
 Developing countries may be particularly hard hit, both by climate change and even
climate change policies; developing countries may rely on carbon heavy inputs. This
is argued by Tol; the damages to income by moving away from carbon heavy
industry and input may be larger than climate damages. However, this narrow focus
on income implies that avoiding climate change is not a worthwhile goal in itself, but
only insofar as income is maximized. Furthermore, the time focus is important here
as climate policies may insure short term costs, while the long term damages of
climate change may be extreme
 Nevertheless, it is questionable to force countries to implement policies that harm
their development especially when most emission still come from advanced
economies
3. Explain why, according to Coronese et al. (2018), measuring impacts at the average (i.e.
using OLS estimates) or at different locations of the damages distribution (i.e. using quantile
regression estimates) leads to different results.
 An average includes some information on the outliers but says nothing specifically
about the outliers; depending on whether there are outliers on both sides, the
average may remain unchanged. This is why tails are important and not represented
sufficiently in the average
 Look instead at the percentiles of the distribution; variance, skewness, and curtosis
can provide insight into the tail
4. The two articles focus on different (direct) outcomes (GDP, deaths, welfare, poverty). We
can also think that climate change can be evaluated at different time horizons. What in your
opinion should climate policy focus on and why?
 The global approach necessary to deal with climate change makes this process very
difficult; there is no mechanism with which to punish countries that do not keep their
climate commitments. As with the refugee crisis, a country’s response may only be
as effective as that of its neighbours, so a unified approach is crucial
 Ethical and philosophical questions of what policies to implement when you don’t
have the knowledge to make sound future predictions; are preventative policies the
way to go?
M8: In today’s session, we consider again the theoretical framework studied in Acemoglu
(2002), i.e. directed technical change and study how, in Acemoglu et al. (2012), the authors
adapt it to evaluate ways to foster the transition from “dirty” to “clean” technologies. The aim
is to study alternative environmental regulation tools under endogenous technology, with the
assumption that technology itself can prevent environmental disasters.
Note that for simplicity, we will focus on the case without exhaustible resources (𝛼2=0).
In this model, the elasticity of substitution between dirty and clean inputs (ε) is again central,
although the authors assume now that a plausible value corresponds to “gross substitutes”,
with ε>1. In the laissez-faire equilibrium (proposition 1), the dirty technology dominates, the
transition to clean technology doesn’t happen, and the environmental disaster can’t be
prevented. Policy interventions in the form of carbon tax and R&D subsidies jointly manage
to prevent such environmental disaster. The duration of such policies (transitory or
permanent) again depends on the elasticity of substitution (proposition 3).
The model therefore allows to evaluate in which parametrization setup the different policy
answers become optimal:
- The Nordhaus answer promoting limited and gradual interventions. Optimal regulations
should reduce long-run growth by only a modest amount.
- The Stern answer promoting instead extensive and immediate intervention, and argues that
these interventions need to be in place permanently even though they may entail significant economic
cost.
- The Greenpeace: essentially all growth needs to come to an end in order to save the planet .
The environment and directed technical change - Acemoglu et al. (2012)
This paper introduces endogenous and directed technical change in a growth model with
environmental constraints. The final good is produced from “dirty” and “clean” inputs. They
propose a simple two-sector model of directed technical change to study the response of
different types of technologies to environmental policies. Profit- maximizing researchers
build on previous innovations.
Main findings:
(i) when inputs are sufficiently substitutable, sustainable growth can be achieved
with temporary taxes/subsidies that redirect innovation toward clean inputs;
(ii) optimal policy involves both “carbon taxes” and research subsidies, avoiding
excessive use of carbon taxes;
(iii) delay in intervention is costly: the sooner and the stronger the policy response, the
shorter will the slow growth transition phase be;
(iv) use of an exhaustible resource in dirty input production helps the switch to clean
innovation under laissez-faire.
market size effect: encourages innovation towards the larger input sector,
price effect: directs innovation towards the sector with higher price
relative magnitudes of these effects determined by:
(i) the elasticity of substitution between the two sectors;
(ii) the relative levels of development of the technologies of the two sectors;
(iii) whether dirty inputs are produced using an exhaustible resource.
Because of the environmental externality, the decentralized equilibrium is not optimal.
laissez-faire equilibrium => “environmental disaster,”

market size effect and the initial productivity advantage of dirty inputs would direct
innovation and production to that sector, contributing to environmental degradation. But
profit taxes (to control current emissions)/ research subsidies (to influence the direction of
research) can redirect TC. And all these interventions are temporary (before clean tech is
advanced.) delay increases the technological gap between clean and dirty sectors
When the two sectors are substitutable but not sufficiently so, preventing an environmental
disaster requires a permanent policy intervention.
when the two sectors are complementary, the only way to stave off a disaster is to stop long-
run growth.
households preferences: Ct : consumption of the unique final
_
good at time t, St : quality of the environment at time t, ρ > 0 is the discount rate. St ∈ [0, S],
_ _
S: quality of the environment absent any human pollution. assumption: S=S0. u(C,S):
utility function, (increasing in C&S)
inada-type conditions:
The last two

conditions imply that the quality of the environment reaching its lower bound has severe
utility consequences
_
assumption: : if S=S => marginal increase in environmental quality is
small
production function:
a unique final good, produced competitively using “clean” and “dirty” input goods, Yc and
Yd, ε ∈ (0, + ∞): elasticity of substitution between two sectors. (gross) substitutes when ε > 1
and (gross) complements when ε < 1. Assumption in line with empirics: ε > 1
Yc and Yd, are produced using labor and a continuum of sector- specific machines
(intermediates) α,α1,α2 ∈ (0,1), α1 + α2 = α, Ajit : (variety) quality of machine of type i in
sector j ∈ {c, d} at time t, xjit: quantity of this machine, and Rt : flow consumption from an
exhaustible resource at time t.
For exhustable resource: Qt: resource stock at date t. c(Qt): per

unit extraction cost for the exhaustible resource
labour supply normalized to 1.
producing one unit of any machine costs ψ units of the final good. Assumption: ψ ≡ α2.
As market clearing for final goods implies:
At the beginning of t each scientist decide to innovate in which sector(j ∈ {c, d}), then
allocated to one machine. ηj ∈ (0, 1): Innovation success probability
1+γ (with γ>0 ): innovation increases the quality of machine from Ajit to (1+ γ)Ajit
A successful scientist, who has invented a better version of machine i in sector j ∈ {c, d},
obtains a one-period patent and becomes the entrepreneur for the current period in the
production of machine i. In sectors where innovation is not successful, monopoly rights are
allocated randomly to an entrepreneur drawn from the pool of potential entrepreneurs, who
then uses the old technology.
sjt : mass of scientists working on machines in sector j. s is normalized to 1. Because of
market clearing:
average productivity in sector j :
Ajt evolves over time:
Eq. 12: St evolve equals whenever the right-hand side is in
_
the interval (0, S). Whenever the right-hand side is negative, S = 0, and whenever the right-
_ _
hand side is greater than S, St+1= S .
ξ: rate of environmental degradation resulting from the production of Yd. δ : of

“environmental regeneration.
 exponential regeneration rate δ captures the idea that greater environmental

degradation is typically presumed to lower the regeneration capacity of the globe.
(example: carbon released from ice cap, depletion of forests decreases carbon
absorption)
 environmental disaster occurs if St = 0. For any v>t, Sv=0. No recovery after this
point.
Environmental Disaster without Exhaustible Resources, α2 = 0 (α1 = α)
The Laissez-Faire Equilibrium: decentralized equilibrium without any policy intervention

sequences of wages (wt), prices for inputs (pjt), prices for machines (pjit), demands for
machines (xjit), demands for inputs (Yjt), labor demands (Ljt) by input producers j ∈ {c, d},
research allocations (sdt,sct), and quality of environment (St) such that, in each period t: (i)
(pjit,xjit) maximizes profits by the producer of machine i in sector j; (ii) Ljt maximizes profits
by producers of input j; (iii) Yjt maximizes the profits of final good producers; (iv) (sdt,sct)
maximizes the expected profit of a researcher at date t; (v) the wage wt and the prices pjt
clear the labor and input markets respectively; (vi) the evolution of St is given by (12);
technology levels Acit and Adit ; and φ ≡ (1 − α)(1 − ε)
ASSUMPTION 1:
: initially the clean sector

is sufficiently backward relative to the dirty (fossil fuel) sector that under laissez- faire the
economy starts innovating in the dirty sector.
normalizing yt to 1:
profits of machine producers:
profit for scientist:

relative benefit from undertaking research in sector c relative to sector d :
here only price effect is in

line with clean sector profotibality.
market size effect encourages innovation in the sector with greater employment, and thus
with the larger market for machines—when the two inputs are substitutes (ε > 1).
 equilibrium:
 innovation will favor the more advanced sector when ε > 1
output:
if ε > 1 and Assumption 1 holds, then there exists a unique laissez-faire equilibrium where
innovation always occurs in the dirty sector only, and the long-run growth rate of dirty input
production is γηd.
Here (ε > 1) and innovation starts in the dirty sector, which is more advanced initially
(Assumption 1). This increases the gap between the dirty and the clean sectors and the initial
pattern of equilibrium is reinforced: only Ad grows (at the rate γ ηd > 0), and Ac remains
constant. Moreover, since φ is negative in this case, (19) implies that in the long run Yd also
grows at the rate γηd.
Directed Technical Change and Environmental Disaster
There is need for intervention to avoid disaster: subsidize scientists to work in the clean
sector, qt (for D periods)
profit of research in clean sector:
redirect research towards clean sector=> all research done in clean sector and Act/Adt grows at
rate γηc=> after D period clean sector becomes enough profitable (Act/Adt becomes large enough) that
needs no intervention => Ydt will grow at the same rate as Aα+φ.
when inputs are strong substitutes (ε ≥ 1/ (1 − α) or α + φ ≤ 0), Ydt will not grow in the
long run.
When inputs are weak substitutes (ε ∈ (1, 1/(1 − α)) or α + φ > 0), then temporary
intervention will not be sufficient. It can redirect all research to the clean sector, but eq.19
shows that Ydt will grow at the rate (1 + γ ηc)α+φ − 1 > 0.
But since ε > 1, as the average quality of clean machines increases, workers are reallocated
towards the clean sector (because of the market size effect). At the same time the increase of
the relative price of the dirty input over time encourages production of the dirty input (the
price effect)
_
 PROPOSITION 3: When the two inputs are strong substitutes (ε ≥ 1/(1 − α)) and S
is sufficiently high, a temporary subsidy to clean research will prevent an
environmental disaster. In contrast, when the two inputs are weak substitutes (1 < ε <
1/(1 − α)), a temporary subsidy to clean research cannot prevent an environmental

disaster.
 under laissez-faire a disaster will occur sooner with directed technical change than
without
where the two inputs are complements, i.e., ε < 1, innovation will favor the less advanced
sector because φ > 0. Thus, under laissez-faire, starting from a situation where dirty
technologies are initially more advanced than clean technologies, innovations will first occur
in the clean sector until that sector catches up with the dirty sector; from then on innovation
occurs in both sectors. Therefore, in the long run, the share of scientists devoted to the clean
sector is equal to sc = ηd/(ηc + ηd), so that both Act and Adt grow at the rate γ η ̃. => Ydt
also grows in the long run => environmental disaster can be avoided only if long-run growth
is halted.
Optimal Environmental Policy without Exhaustible Resources
The socially optimal allocation can be implemented using a tax on dirty input (a “carbon”
tax), a subsidy to clean innovation, and a subsidy for the use of all machines (all proceeds
from taxes/subsidies being redistributed/financed lump sum). This correct for three market
failures:
- the underutilization of machines due to monopoly pricing in the laissez-faire

equilibrium is corrected by a subsidy for machines.
- the environmental externality is corrected by introducing a wedge between the

marginal product of dirty input in the production of the final good and its shadow
value—which corresponds to a tax τt on the use of dirty input.
p^jt : shadow (producer) price of input j at time t in terms of the final good. ISt+1,…, Sv takes
_
value 1, if St+1,…, Sv< S, and ) otherwise.
1st : subsidy deals with future environmental externalities by directing innovation toward the
clean sector, so that in the future production can be increased using more productive clean
technologies
2nd: tax deals more directly with the current environmental externality by reducing production
of the dirty input, also discourages innovation in that sector. If there is no 1st, 2nd needs to be
higher to indirectly subsidize clean R&D.
scientists are allocated to the clean sector whenever the ratio
>1
PROPOSITION 6: Suppose that ε > 1 and the discount rate ρ is sufficiently small. Then all
innovation switches to the clean sector in finite time, the economy grows asymptotically at
the rate γ ηc, and the optimal subsidy on profits in the clean sector, qt, is temporary.
Moreover, if ε>1/(1−α) (but not if 1<ε<1/(1−α)), then the optimal carbon tax, τt, is
temporary.
VoxEU interview with Philippe Aghion, 2010: “Green innovations”

R&D subsidies and carbon tax*
Reduce Production of industries with dirty inputs (carbon tax), lower their profitability
triggers shift towards clean input / innovate clean or dirty tech(subsidy), direct
impact on innovation direction
Carbon tax: + untargeted
-: pressure on consumers
Subsidies +:
_:
Past dependence: you continue on what you are good at. The same innovation pas/ we have a
lot innovation in dirty sector
Some good shifts: rising the price of fuel/ carbon tax, conscious consumers/private firms and
change their preferences,
If gov don’t intervene, firms continue to produce dirty tech

Who ever enters and shifts pattern can get the subsidy (don’t discriminate between firms and
create competition between them). Firms have sectoral policy and innovate in clean sector.
Private investment: co-finance and cooperation between public and private.
In addition to macro models and macro view there are other factors like elasticity of
substitution between clean and dirty and also productivity of each sector that needs micro
foundation and data (like IO).
IO: industrial organization. go into the details that how firms innovate
o Dechezleprêtre (2017), “Sustaining investment in climate innovation”, Climate KIC
Climate Innovation Insights, Series 1.2.
Paris Agreement, limiting global warming to 1.5°C at the end of the 21st century compared
to pre-industrial levels. => halving global greenhouse gas emissions by 2050 and near zero
emissions by 2100. decline by 6 per cent each year.
investments in R&D, leading to greater innovation in low- carbon technologies (patents):
Buildings , Energy production , Manufacturing , Transportation , Waste management
Lower investment and innovation as a result of collapse in oil prices. the absence of prices on
carbon emissions and wider constraints to innovation. Together, these justify the need for
government intervention. By carbon taxes or emissions allowances. European Union
Emissions Trading System (EU ETS) request these allowances in Europe.
Since it is expectations about future prices that determine innovation, long-term regulatory
predictability is crucial. (high and stable carbon price)
70 per cent of emissions are not priced at all and only 4 per cent of emissions are subject to a
carbon price above €30.
Solution: Agreeing on a single, internationally binding minimum carbon price,9 or

establishing a price band for carbon emission rights in existing carbon markets, adopt new
low-carbon technologies in all economic sectors.
Impediments for investment in innovation : ‘public good’ nature of knowledge (reduces the
profit of R&D), barriers to financing R&D investments (since information about the potential
of a new technology is only held by the innovator), long-lived infrastructure investments (e.g.
in power plants, petrol stations), the dominant positions of incumbent businesses, and
regulatory barriers in the energy market.
Solution: public funding for basic research, subsidies for private R&D, better access to
finance, funding for demonstration projects, technology accelerators and incubators, and
support for the commercial deployment of early-stage technologies, such as feed-in tariffs
that subsidise electricity produced from renewable sources. stronger public support at the
early stages
Class:
Two types of greening: 1.Green input 2. How green is production
Efficiency of the machines, waste of machines, using less water etc. can determine that.
The way you produce the products that substitute the products that already exists. Reach
100% sustainable productions. Focus on large industry that have impact on macro, to get the
most possible gain.
Questions
1. Explain how the results and policy implications of the model change with different levels
of the elasticity of substitution between clean and dirty technologies.
2. The article by Acemoglu et al. (2012) focuses on policy options solely based on
Dechezleprêtre (2017), is this not enough, and what alternatives are there?
 Similarities: Acemolgu et al. (2012) and Dechezleprêtre (2017) are similar that both suggest
to have a carbon tax/ carbons prices and subsidies to sustain investment in the clean sector.
 Differences: Dechezleprêtre (2017) says that this ‘first-best policy’ that Acemoglu suggests is
not enough, there also needs to be more access to finance → there is not enough banking
and finance available for firms that want to invest in clean technology. There is a too high
risk and investments into these clean sector are expensive, that is why Dechezleprêtre
(2017) argues that there should be more access to finance. Furthermore, in the paper by
Acemoglu et al. (2012) the implementation stages of policy is also not mentioned.
 Linking a technology-oriented view on how to address climate change to reality:
 Technological change is important to address climate change but it is not enough. There also
needs to be structural changes into the economy such as for the transport sectors or
consumption patterns or more access to finance as mentioned before. Therefore,
technological change in combination with structural changes in the economy can help a lot
to address climate change.
3. The framework presented in the article, in the interview and in the policy brief highlight a
technology-oriented view on how to address climate change. Present pros and cons from such
view.
Next to subsidies, a carbon tax is needed because there are more externalities that need to be
internalized.
1. The carbon tax corrects for the use of dirty inputs → the tax reduces the profitability of the
dirty sector by affecting production → it reduces emissions today & lowers the market size
effect
2. The subsidy is needed to incentive research to the clean sector → this creates a long-term
directed technological change towards to clean sector
Thus, both a carbon tax and a subsidy need to be used to sustain the environment and this is called
the ‘first-best policy’.
M9: In recent decades, we have experienced the harmful effect of increased global economic
activity and international trade on the environment. Since firms operate in a global
competitive environment, many of them choose to produce in so-called pollution havens. By
choosing countries with the weakest environmental regulations, they stimulate the race to the
bottom. Therefore, increasing global activity created by globalisation clearly harms the
environment.
However, it is unclear whether limiting trade would actually help the environment. When
every country has to produce the goods it consumes, the production inefficiencies across
countries could also increase global emissions. Also, it is often said that multinational firms
spread knowledge about cleaner production technologies to host countries. It is therefore not
easy to determine whether the growth of international trade is beneficial or harmful for the
environment.
The Chinese import ban and its impact on global plastic waste trade - Brooks et al.
(2018)
Summary:
disposal of plastic materials has been a challenge for waste management systems with
impacts on environment and ocean. Instead of recycling, upward of half of the plastic waste
has been exported to other countries. China, which has imported a cumulative 45% of plastic
waste since 1992, recently implemented a new policy banning the importation of most plastic
waste. higher-income countries in the Organization for Economic Cooperation have been
exporting plastic waste (70% in 2016) to lower-income countries in the East Asia and Pacific
for decades. 89% of historical exports consist of polymer groups often used in single-use
plastic food packaging (polyethylene, polypropylene, and polyethylene terephthalate)
plastic growth production: 2 million metric tons (MT) produced in 1950 to 322 million MT
produced in 2015 (1, 2). A cumulative total of 8.3 billion MT of plastic has been produced as
of 2017. 6.3 billion MT of plastic waste generated worldwide. 9% of plastic waste has been
recycled globally. The rest goes to landfilled or environment (80%). 40% of packaging is
plastic. 60% of beach litter is plastic packaging.
Recycling complication: different types, additives and blends in plastic, recycling restrictions
due to material feature, Commingled and single-stream recycling operations
“Green Fence” : in 2013 China introduced a temporary restriction on waste imports that
required significantly less contamination to increase the quality of the plastic waste that
China was receiving and to reduce illegal foreign smuggling and trading
in 2017, China announced a new import policy permanently banning the import of
nonindustrial plastic waste.
Authors estimate the quantity of plastic waste that would be displaced on the basis of
historical cumulative imports of plastic waste into China. Historical cumulative import data
were projected forward in a business-as-usual (BAU) scenario using a best-fit trendline
analysis, bounded by upper and lower estimates
Global annual imports and exports of plastic waste:
exporters are High Income (HIC) countries (87% of all exports). OECD have contributed to
64%. Imports are evenly split between HIC and Upper Middle Income (UMI) countries.
 Major trade is between OECD, mostly HIC (like Japan, US, Germany), and EAP
(East Asia and Pacific), mostly low- or middle-income, countries
These destination countries usually plan to recycle it.
Why HIC export it?
 high domestic waste management costs in exporting countries (for example for
transportation)
 to preserve solid waste management capacity. Export it to the countries with looser
environmental regulations.
Result: import of plastic waste to China contributes 10 to 13% additional mass to the
domestic plastic waste; 1.3 million to 3.5 million MT of plastic is estimated to enter the
oceans annually from China’s coastline;
solution:
- reducing quantities of nonrecyclable materials,
- redesigning products,
- funding domestic plastic waste management
- After China changes its policy Both the displaced plastic waste and future increases in
plastic recycling must be addressed immediately.
- Basel Convention: governs the export of hazardous and other waste. Basel also
provides a framework for knowledge sharing and promoting the proper management
of waste, including harmonization of technical standards and practices, which could
help build capacity to properly manage plastic waste around the world.
- strict liability: waste producers and exporters are accountable for making sure that the
material they ship is properly managed by any receiving entity.
- each country wishing to continue to import significant quantities of plastic waste

could consider an import tax specifically to fund the development of solid waste
management infrastructure within that country
Data:
UN Comtrade Database provides the most comprehensive international trade data regarding
imports and exports of many commodities. organized on the HS basis
trade values data: UN database in U.S. dollars
Economic classifications: gross national income estimations reported by the World Bank
Population: the World Bank
variation in how reporting is done, valuation between the commodity source and destination
country, and timing of reporting can affect the consistency and reliability of the data.
Methodology:
displaced plastic was represented by the difference between the projected BAU cumulative
Chinese imports in 2030 and the 100% implementation of the ban in 2030.
regression fits :
1. a linear fit of all the data (1988–2016)

2. a second- order polynomial fit of all the data (1988–2016)
3. a linear fit of the linear part of the curve, in the last 10 years (2006–2016)
The highest and lowest of these projections were used to bound the estimate of displaced
plastic. The “best” estimate is in between the linear regression of all the data (projected at
63.3 million MT) and the second-order polynomial (projected at 195 million MT). Thus, the
10-year linear regression estimate of 111 million MT became the best estimate
Impact of imported plastic waste in China:
Waste generation rates were multiplied by the population and converted to years and MT to
calculate the plastic waste generation (in MT) per year. Authors then summed the plastic
waste generation values and imported plastic waste values to determine the total waste to be
managed within China per year. Finally, the impact was estimated by the percentage of
plastic waste that was imported each year divided by the total waste to be managed.
VoxEU (2019), “The role of trade in adaptation to climate change”, by Christophe

Gouel, David Laborde,
as climate change affects crops’ yield potential, new patterns of comparative advantage, and
hence new trade flows, will emerge.
This column examines the importance of the market adaptations in mediating welfare losses
in the agricultural sector.
when adjustments in trade flows are constrained, global welfare losses from climate change
increase by 76%.
This adaptation doesn’t rely on international coordination; individual countries, and even
economic agents, can undertake adaptation, incentivised by environmental and price
changes.
1. changing varieties or planting times: within-country reallocation of land to crops or other
uses more consistent with the yield under the new climate
2. market-mediated adaptation: landowners will change their land allocation not only because
of the new potential yield but also because of changed prices under the new climate, which
account themselves for all the adaptation in demand, supply, and trade.
the role of market-mediated adaptation to climate change, with a focus on the adaptive role of
international trade.
model is calibrated to reproduce the market situation in 2011 as the baseline, using
information about potential yield for each crop and each field under the current climate
This simulated climate change shock delivers three main results about the adaptive role of
trade. First, terms-of-trade changes heavily influence welfare effects.
Figure 2 decomposes welfare changes into terms-of-trade changes and productivity changes,
with the terms-of-trade changes summing to zero at the world level. All regions lose from
reduced crop productivity (although a few individual countries may gain), but some are more
than compensated by terms-of-trade gains. Because total food demand is inelastic, an average
decrease in crop productivity will increase food prices substantially. So, net-food-exporting
regions, namely Latin America, Northern America, and Oceania, will benefit, and the burden
of adjustment to climate change will fall to net-food-importing regions, namely Asia, Europe,
and the Middle East and North Africa.
Second, future patterns of international trade flows in agricultural products may look
extremely different from current patterns because of the effects of climate change. Now
northern countries produce more maize
Third, change in crop choice appears to be the most important source of adaptation, but trade
adjustments also play a key role.
As many poor countries are tropical, they are often the worst affected by climate change in
terms of crop productivity. This direct effect is compounded by agriculture’s large share of
the economic activity in these countries. Finally, in aggregate, poor countries tend to lose
either from the terms-of-trade changes because they are net food importers (Asia, and the
Middle East and North Africa) or from more limited adaptation through trade because of high
trade costs and specialisation in crops with little trade (Sub-Saharan Africa).
Policy: Large terms-of-trade effects as predicted by our results may prompt uncooperative
trade policies from policymakers to counteract these reallocations. If policies prevent trade
adjustments as an avenue for adaptation, welfare losses would likely be worse in the long
run.
In this context, some of the difficulties related to international coordination that we face for
greenhouse gas mitigation may also plague adaptation. A rule-based trading system will be
needed to enable climate change adaptation. Strengthening the role of the WTO should be
viewed as integral to actively pursuing the UN Framework Convention on Climate Change
agenda.
Questions
1. Is the trade and trade policy of plastic waste similar to the trade of any other good?
Is the WTO the main institution regulating the trade of waste?
It is regulated by the Basel accords which are part of the CAP agreements. It is a series of
conventions that established general agreements on the processing and trade of waste. See for
more information: http://www.basel.int/ We find that the WTO does not currently allow for
exceptions on import quotas for environmental reasons, although it is better to diverge from
general WTO rules when this enables more free trade (the core principle of the WTO).
Examples include NAFTA & MERCOSUR.
2. How did advanced economies react to the plastic waste ban of China? (i.e. what did they
do with the waste in the short-run and did it change the production process in the medium-
run)
We argue that there has been more domestic development of recycling, but not a lot. This was
due to the expectation that the Chinese import restrictions were going to be temporary.: The
fact that it was a transitionary policy means that there was not enough security for domestic
investment. Thus organisations just wait and see. This is also why the 2017 ban may have
different effects due to the permanent nature of the implemented ban.
What are the conditions for policy implementation like this to reducing waste/developing the
circular economy?
The cheapest price will be leading; As long as exporting waste is cheaper than processing it
domestically it will not change. This behaviour could be changed by implementing export
tariffs that impose extra costs on the export of plastic, hereby essentially making it more
expensive to export the externality. This would in turn incentivise domestic parties to
developing waste processing capabilities.
3. More in general, what are the different channels linking trade and climate change?
a. trade mitigates the impact of a climate shock on a country by mitigating the domestic
price-
hike due to the availability of international substitutes.
b. there is scope for countries to implement bans on the use/export of certain “very harmful”
products.
c. make the importing companies responsible for the entire supply chain, and thus responsible
for reducing negative climate related externalities.
 Being a front runner of climate change policy should have financial benefits.
 Coordination such as the Paris Agreement
 Policy and coordination should still be about greenhouse gasses etc, and because if
it is done globally, it does not have an effect on trade.
 Trade itself is not good for the environment because of transportation. However, it
helps the developing countries when dealing with climate change. It can be used to
defect migration.
M1

· Income difference across countries: catching-up ó falling behind
· Role of technology: technology gap
· Policy: raise equality, raise delta
M2
· 2 dimensions: diversity + ubiquity
· HH and C differ in way they aggregate (HH: average ó C: non-linear)
· Forecasting GDP growth
· Economic complexity
· Income inequality across countries
· Globalization
· Technology/development
· Policy: diversify country

M3
· Comovement BC via linkages:
o Common shocks
o Direct linkage: IM and EX
o Indirect linkage: upstream and downstream
· Effect of large and directly linkages
· Risks of globalization
· Policy: recovery (helping others) + resilience (diversify in countries)
M4
· Price and market size effect
· State dependence
· Economic growth theory
· Income inequality driven by technology
· Policy: Income inequality across workers + growth + R&D
M5
· RBTC and SBTC
· Offshoring
· Policy: availability of skills
M6
· Need for specific skills/tasks
· Offshoring affects demand for skills
· Chinese imports, cause for inverse trend figure 1?
· Inequality
· Employment
M7
· Economic impact of climate change
· Income inequality across countries (different effect for different countries
· Policy: able to evaluate policy outcome + target à need for policy?
M8
· Different approaches: Nordhaus, Stern, Greenpeace
· Permanent, temporal, gradual…?
· Carbon taxes, subsidy
· Path dependence
M9
· Link globalization/trade – climate change through different channels
Mock exam
· Use input paper to discuss
· Pay attention for difference in question: policy target/tools/impact/measures
· Referencing
· Referring to figures/equations is allowed (do not have to give them)


Autor Interview: Mastaneh Nikroo M1-20/04

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Mastaneh Nikroo M1- 20/04

 - Autor interview: “Inequality, technological change, and globalisation”

Scares skills: higher reward. impact of trade and tech on jobs:

Trade (globalization) exposure depends on the characteristic of economy/sector, for example

Tech (computerization) exposure depends on the possibility of machine substitution. For

In long run: making educational investments that is more durable

Cheaper machines => more mechanization of routine tasks

 - Wilkinson TED talk : “How economic inequality harms societies”

Inequality=> sense of superiority and inferiority, competition and consumerism, status

 Stop tax heavens, employee ownership, more aggressive taxes

o Project Syndicate (2020): Link

inequality grew within countries reflects their unique

the world’s richest 1% captured twice as much as the bottom 50%.

A NEW EMPIRICAL APPROACH TO CATCHING UP OR FALLING BEHIND-

1. Define income inequality measures and describe recent trends

2. Why does technology matter for economic development?

3. What is the economic mechanism linking technology and inequality?

The building blocks of economic complexity - Hidalgo and Hausmann (2009)

Kc; 0:div, 1: ub (div), 2: div (ub(div))

Cca=1(probability r) if c has capability a, 􏰋 pa =1

Products- Cristelli et al. (2013)

this implies that the acquisition of a new capability k

: different between export with addition

the higher is the number of capabilities owned by the country c, and

2. Weighted (GDP, extensive) (0,1)M: each exporter of a product is weighted according to

qcp giving the total export of one product p

successfulness of a country is given by the

2. Discuss and compare the approaches used in the two papers

The micro origins of international business-cycle comovement - Di Giovanni et al. (2018)

2. At the macro level: it captures the aggregate comovement implications of heterogeneity

Linkages between firm and country:

3. Being a France-based affiliate of a multinational firm headquartered in that country

4. Being a French firm with a foreign affiliate in that country

Xt: total value added by all French firms in year t

Xft: value added of firm f in year t

It: the set of firms f operating at t

γAt= Xt/Xt−1 − 1 = ∑ wft−1γft

γAt: growth rate of aggregate value added

γft : the growth rate of value added of firm f

wft−1 : share of f ’s value added in total French value added

γCt : GDP growth of a foreign country C

σf : standard deviation of γft

 the aggregate business-cycle comovement (correlation between the French economy

This correlation is defined as:

multinational with affiliates in C (HQf, C), or is an affiliate of a foreign multinational

headquartered in C (AFFf, C) all binary

IOij : share of spending on domestically produced sector i inputs in production in sector j

NIMi, C : number of French firms in sector i that import from C

NEXi,C : number of French firms in sector i that export to C

Ni : total number of firms in sector i

Macro level analysis:

IC: direct linkage, IcC : the

If directly connected firm f is no longer connected with C, the impact on correlation=

For indirect linkage: (upstream and downstream= 0 for firm f)

advances—in transportation, information, and communications—and lower trade

Threats: 1. Labor-saving tech reduces demand for labor 2. Trade conflict

Hyperspecialization enhances efficiency, and durable firm-to-firm relationships promote the

Pricing environmental degradation , energy and production subsidies, taxing carbon

Trade wars in the global value chain era

IPP Policy brief*

Directed technical change: framework and implications - Acemoglu (2002)

international trade may induce skill-biased technical change.

Two forces driving innovation: