Political Commitment Theory of Trade Agreements

The political commitment theory of trade agreements argues that trade agreements arise due to the desire of the government to signal to private investors that they wish to pursue pro-growth policies. If announced unilaterally, this signal is not binding and so may not induce investors to invest, as they may not be confident that the government will stick to its announcement. However, when signalled via the signing of an international treaty, this may increase confidence that the government will stick to its promise, because the punishment from breaking its international commitments is much higher than if it broke a unilaterally declared promise. This theory therefore complements are understanding of why governments sign-up to trade agreements, and more importantly, explains why small countries enact tariff reductions when they don’t benefit from reductions in the terms of trade externality, due to their economic size.

Why has wage inequality risen?

Wage inequality has increased in many economies in recent decades. Discuss the three leading hypotheses regarding the causes of this increase. What does the empirical evidence tell us about the quantitative importance of each of these factors?

The US economy has almost double since the 1970s, and labour productivity has risen over this period. Yet real wages for the median worker hasn’t changed much since the 1970s, and below-median male wages have fallen; showing that the increasing size of the economy hasn’t been fairly distributed.

The rise in inequality between high skilled and low skilled workers is particularly pronounced, with Autor finding that households which are composed of university education individuals earned $30,298 more than non-skilled workers in 1979, but this rose to $58,249 by 2012, an increase of 92%. [...]