Foreign productivity improvements and domestic welfare effects

PurposeThis paper aims to shed light on two mechanisms that show how foreign productivity improvement affects domestic welfare.Design/methodology/approachFirst, this study applies a general equilibrium model that takes into account how wages respond to productivity improvements. Second, this study uses a monopolistic competition model that shows how benefits or losses from foreign productivity changes are distributed within domestic economy.FindingsFirst of all, this study shows that a region’s productivity improvement is beneficial for the region itself as well as for its trading partner. Moreover, the study finds that productivity improvement in a developing region is beneficial for the entire economy, benefits all unskilled workers in the economy and skilled workers in the developing region and hurts those in the developing region’s trading partner.Originality/valueThis study contributes to the existing literature in two key aspects. First, the study applies a two-region, two-factor, one-sector general equilibrium model with flexible wages, and second, the study uses a two-region, two-factor, two-sector monopolistic competition model, relaxing the single-factor (labor) assumption, which is used in other works. Under the single-factor assumption, foreign productivity changes do not have any impact on domestic income distribution. In reality, however, any productivity change between countries creates losers and winners within each country. Hence, the author believes that it is imperative to study how benefits or losses that come from foreign productivity changes are distributed between domestic production factors.

Comments on “The History of Modern Shipbuilding Methods: The U.S.-Japan Interchange” and “The Productivity Problem in U.S. Shipbuilding”

Comparisons of technology and productivity between U.S. and Japanese shipyards are made in two papers in the first issue of the Journal.23 Such comparisons are very difficult and, to some extent, questionable because of the differences in ships and in cost-keeping practices. They are complicated further by the intervention of governments in shipyard operations. In any case, the comparisons show that equalling foreign productivity would not make U.S. shipyards cost-competitive. A coherent government policy implemented by coordinated action is necessary to ensure the operating stability which is essential for productivity and innovation. This was shown by the U.S. wartime program. Clear aims and policies and coordination by government and industry—the entire industry, not led by any one organization or individual, such as Kaiser—produced both extraordinary output and innovation. Many new technologies can only be applied successfully in long-run stable programs which make the productivity gains from both innovation and series production possible.