International Trade In Argentina And El Salvador

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Running head: INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
International Trade in Argentina and El Salvador
Name of the Student
Name of the University
Author Note

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1INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Executive Summary
The paper has attained to evaluate the relationship between economic inequality and trade
openness for each of the two countries. The paper involves two different analysis techniques,
including, data analysis and technical analysis. The data analysis section is comprised of visual
diagram representation and statistical measurements to examine the impacts of inequality on the
trade openness. Apart from that, the paper has also included the concept of Ricardian model to
identify the reasons behind the participation of the nations into the international trade. Finally,
the paper concludes the Stolper-Samuelson theorem to explain the relationship between
inequality and trade openness.
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2INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Table of Contents
Introduction......................................................................................................................................3
Data Analysis..............................................................................................................................4
Technical Analysis......................................................................................................................8
Conclusion.....................................................................................................................................15
Reference list.................................................................................................................................17
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3INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Introduction
The objective of this paper is to evaluate the international trading condition of Argentina
and El Salvador. El Salvador has been reported to experience slow economic performance with
expected growth of 2.5% (approximately). Agricultural sector is the dominating sector of the
Salvador economy. Slow progress in the poverty reductions rate highlights the worsening
situation of the income inequality of El Salvador. On the other hand, the economy of Argentina
has been flourished owing to its vast export-focused agricultural sector. However, the country
has slipped its position in terms of the economic freedom index in 2019. This data denotes that
the trade sector of Argentina has received significant negative impacts due to the dwindling
global finance situation (Alvaredo, Cruces and Gasparini 2018). The study has been developed
with the help of data available in the World Bank website. The data range considered for the
analysis ranges between 1998 and 2014. The reliable database of the World Bank is expected to
generate effective outcome for the study. The certain observation has been developed on the
basis of five important economic variables, such as, imports, exports, Gross Domestic Product
(GDP), GDP per capita and GINI Index. As per the statement, both countries are abundant with
unskilled-labors. According to the economists, the economies participate in the global trade as to
export goods in which the economy holds competitive position (Yang and Greaney 2017). The
study attains to examine whether overseas trade improves the situation of unskilled labors using
Stolper-Samuelson and Ricardian model. Both the international trade theories have been applied
to validate the objective of the trade liberalization for both two countries.

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4INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Data Analysis
Step 1: Graph Data Points
Source: (Data.worldbank.org. 2020)
Table 1: Dataset of Argentina
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5INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Source: (Data.worldbank.org. 2020)
Step1: Graph type and Labels
40 42 44 46 48 50 52 54 56
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
GINI Index Vs Oppenness - Argentina
GINI Index
Oppenness
Figure 1: Scatter diagram for Argentina
Source: (as created by the author)
Table 2: Dataset of El Salvador
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6INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
40 42 44 46 48 50 52 54 56
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
GINI Index Vs Oppeness - El Salvador
GINI Index
Oppenness
Figure 2: Scatter diagram for El Salvador
Source: (as created by the author)
Step 2: Correlation Coefficients and Comparison
As per the statistical calculation, the correlation coefficient between openness and GINI
coefficient for Argentina is -0.1. The figure implies that there exists negative relationship
between openness and inequality (Wahiba 2015). In Argentina, practice of trade openness has
resulted in the better outcome for the higher income group than lower income group
On the contrary, correlation coefficient for El Salvador is -0.8. The cumulative impact of
both export and import deeply influence the currency value in the international market. Here,
trade openness has resulted in the wage increase for unskilled labors in El Salvador. This
eventually leads to the less income inequality in respect of trade openness.
The statistical outcome implies that there is negligible difference in term of the
correlation value for both countries. The degree of negative association is greater for El Salvador
than Argentina. The scatter diagram exhibits the association between openness and inequality
(Kanbur 2015). The higher association correlation coefficient for Argentina denotes that trade

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7INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
has been successful in reducing the wage inequality between the skilled and unskilled labors.
Meanwhile, Argentina also recorded a lower position by 0.1 point in terms of the freedom index
as compared to the previous year. The overwhelming government expenditure combined with
undermining monetary policy is considered as a cause of deteriorating trade performance of
Argentina (Gindling 2018). The inequality in terms of wage between skilled and unskilled labor
is not reported to receive significant impact due to trade openness. On this account, the real
income of the intensive factor has been reported to get improved from the autarky situation to
free trade condition. Henceforth, unskilled labor is not intensively used as a factor of production
for El Salvador.
Step 3: Stopler Samuelson theorem and data interpretation
According to Stopler-Samuelson theorem, advancement in real income of the factor of
production is possible when the factor is being intensively used for the production process. The
wages of the workers associated with the production of the intensive products likely to be
improved due to higher demand (Tsaurai 2018). The theory explains how price of the goods and
service affects the price of production factors under zero-economic profit. It further analyses how
factor income gets influenced when nations move to free trade from autarky condition. El
Salvador has slipped into the rank position under the Economic Freedom Index 2019.
Cumbersome bureaucracy coupled with institutional weakness is considered as the deteriorating
position in the trade openness. Hence, consequences of trade openness in terms of both two
countries are not supported by Stolper-Samuelson theorem. Data reveals that openness does not
get deeply affected by the inequality of the country. The improvement in the wage of the
unskilled labors reflects that unskilled labor is the intensively used as a factor of production for
Argentina (Odeh 2015). The formal wage level in Argentina has been increased by 30% owing to
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8INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
trade openness as stated in the OECD Economic outlook (Oecd.org 2020). On the other hand, El
Salvador has faced 50% increase in the formal wage which is remarkably larger than Argentina.
Technical Analysis
Step 4: Demand Curve
According to the study, the world economy consists of only two nations (Argentina and
El Salvador) which produce two goods, such as, Hammers and Widgets. Labor is the noted as the
sole factor of production. The theory states that two countries will be engaged in the trade
exercise even if the labor efficiency varies for both nations (Battistón, García-Domench and
Gasparini 2014). 50 workers in Argentina and 75 workers are engaged in the production of two
mentioned goods. Each worker in Argentina produces 4 Hammers or 2 Widget, whereas, each
worker produces 2 Hammers or 2 Widgets in El Salvador. Therefore, Argentinian workers will
produce 100 units of Widgets or 200 units of Hammer as a whole and El Salvador will be
producing 150 units of Widget or Hammer using the entire labor force. Considering the fact, the
paper has attained to explain the production capability of two countries (McKenzie, Theoharide
and Yang 2014). The production Possibility Frontier explains the possible combination of two
products that can be produced using the entire factors of production.
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9INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Widget Widget
Hammer Hammer
Argentina El Salvador
200
100
150
150
Figure 3: Production Possibility Frontiers
Source: (as created by the author)
Figure 3 denotes that Production Possibility Frontier is relatively steeper for El Salvador.
As per the statement, each worker in El Salvador is capable of producing both goods in same
amount and also owns greater number of workers than Argentina (Marinakis 2015). The
difference in the production amount can be explained incorporating the concept of Ricardian
Model. The model states that opportunity cost is the important deciding factor for the countries
whether they should engage in the international trade (Kang-Kook 2014). In this case, difference
in the labor productivity is the only responsible factor as labor is the only available factor of
production for both countries.
As per the statement, consumers spend half of their income on Hammers and half on
Widget. It seems like the Cobb-Douglas utility function which assigns equal weight for both
goods. This asserts that (quantity of Widget demanded) / (quantity of Hammer demanded) = 1/
(relative price of Widget). This provides the relative demand curve.

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10INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
0.5 1.0 1.5 2.0 2.5 3.0
3.0
2.5
2.0
1.5
1.0
0.5
Relative demand for widget
Now, relative demand curve will be determined by
Qw
QH = PH
PW = 1
PW
PH
Pw/PH QW/QH = 1/ (PW/PH)
1 1/1 = 1
2 ½ = 0.5
0.5 1/0.5 = 2
Figure 4: Relative demand curve for Widget
Source: (as created by the author)
Table 3: Relative Demand with respect to relative price
Source: (as created by the author)
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11INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Step 4: Supply Curve
Table 4: Algebraically representation of Ricardian Model
Country Labor Units Hammer Widget Opportunity Cost of Widget
Argentina 50 4 2 2/4 = 0.5 (Widget)
El Salvador 75 2 2 2/2 = 1 (Hammer)
Source: (as created by the author)
From table 4, it is clear that opportunity cost of widget is less in Argentina as compared
to El Salvador. This implies that Argentina owns comparative advantageous position in the
production of Widget than Hammer. On the other hand, it will be effective if El Salvador
specializes its production process for Hammer as production cost of widget is smaller than
Hammer (Lim and McNelis 2014). Hence, Argentina will utilize its all resources on the
production of Widget and El Salvador will utilize its all economic resources on the production of
Hammer. This states that Argentina will use 50 units of labor to produce 2 units of Widgets.
Meanwhile, El Salvador will use 75 units of labor to produce 2 units of Hammers.
Qw+Qw
QH +QH¿=50 /2
75 /2 =2
3 =0.66 ¿
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12INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
0.5 1.0 1.5 2.0 2.5 3.0
3.0
2.5
2.0
1.5
1.0
0.5
Relative supply for widget
Both countries produce only Hammer
Both countries will produce only Widget
El Salvador produces Hammer, Argentina produces Widget
Figure 5: Relative supply curve for Widget
Source: (as created by the author)
According to figure 5, Argentina will specialize its production on Widget and El Salvador
will specialize its production on Hammer at the point of 0.66. At this point Qw* and QH will be
zero as two countries specialize their production techniques for two different goods. At the point
of 0.5, Widget will be continuing to produce up to 0.66. Afterwards, the curve will start moving
upwards to point 1 and henceforth, the supply curve will be horizontal again. Altogether, it
makes the relatively supply curve of Widget step as correspondence to the relative price of the
Widget.

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13INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
0.5 1.0 1.5 2.0 2.5 3.0
3.0
2.5
2.0
1.5
1.0
0.5
Relative supply for widget
Relative demand for widget
Step 4: Equilibrium Graph
Figure 6: Free trade equilibrium for Widget
Source: (as created by the author)
Considering the figure 6, the equilibrium occurs when relative supply equals to the
relative demand curve. In case of autarky, relative supply equals to relative demand. Now
assume that the countries are engaged in the free trade when tariff or transaction cost is not
applicable. Here, he negatively sloped demand curve intersects the step supply curve when
relative price of widget is $1 correspondence to relative demand 1 unit.
Step 4: Free Trade Production
As per the diagram, world equilibrium price for widget is $1 which is the autarky price
for El Salvador. Hence, it can be concluded that El Salvador will continue to produce both
Widget and Hammer. On the contrary, Argentina will specialize its production only on Widget.
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14INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Widget
Hammer
2
4
4
This result completely supports the theory of Ricardian Model which states that small countries
gain more than the large countries. According to statistics, Argentina is economically stronger
than El Salvador (Acosta and Montes-Rojas 2014). Both countries will continue to produce
Hammer of 0.66 units up to the relative price of $0.5. Afterwards, El Salvador will continue to
produce both Widget and Hammer, whereas, Argentina will produce only Hammer.
Step 4: Worker’s stance towards free trade
Figure 7: The effects of trade in El Salvador
Source: (as created by the author)
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15INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Widget
Hammer
2
2 4
Figure 8: The effects of trade in Argentina
Source: (as created by the author)
Referring to figure 7 and 8, it can be explained that utility of workers from both nations
will be improved under free trade. The workers are expected to have higher income due to
specialization in one product. According to data, Argentina is technically advanced than El
Salvador. Hence, the workers of Argentina will be easily able to improve the production of
gadget, like, Widget as compared to Argentina (Lim and McNelis 2016). On the other hand, El
Salvador being a labor intensive country, Hammer production will be the best option for the
country.
Conclusion
The paper concludes that the nation having lowest opportunity cost is expected to have a
comparative advantage for particular good. However, one country cannot have the comparative
advantage for both goods because of the reciprocal assumption of opportunity cost. Similarly, a

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16INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
country can have the absolute advantage if workers are good in producing the goods. Difference
in the technology and labor productivity is the expected responsible factors which cause
difference in the production. In this regard, it is important to evaluate the nation’s production
capability at the autarky position. Comparing autarky along with the free trade helps to analyze
the trade situation of the economy. The study observes that El Salvador has gained in the
production of two goods, whereas, Argentina gains for only one good.
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17INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Reference list
Acosta, P. and Montes-Rojas, G., 2014. Informal jobs and trade liberalisation in Argentina. The
Journal of Development Studies, 50(8), pp.1104-1118.
Alvaredo, F., Cruces, G. and Gasparini, L., 2018. A short episodic history of income distribution
in Argentina. Latin American Economic Review, 27(1), p.7.
Battistón, D., García-Domench, C. and Gasparini, L., 2014. Could an increase in education raise
income inequality?: evidence for Latin America. Latin american journal of economics, 51(1),
pp.1-39.
Data.worldbank.org. (2020). Argentina | Data. https://data.worldbank.org/country/argentina
Data.worldbank.org. (2020). El Salvador | Data. https://data.worldbank.org/country/el-salvador
Gindling, T.H., 2018. Does increasing the minimum wage reduce poverty in developing
countries?. IZA World of Labor.
Kanbur, R., 2015. Globalization and inequality. In Handbook of income distribution (Vol. 2, pp.
1845-1881). Elsevier.
Kang-Kook, L., 2014. Globalization, income inequality and poverty: Theory and
empirics. Social System Studies, 28, pp.109-134.
Lim, G.C. and McNelis, P.D., 2014. Income inequality, trade and financial openness.
Lim, G.C. and McNelis, P.D., 2016. Income growth and inequality: The threshold effects of
trade and financial openness. Economic Modelling, 58, pp.403-412.
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18INTERNATIONAL TRADE IN ARGENTINA AND EL SALVADOR
Marinakis, A., 2015, June. Minimum wage implementation in Latin America. In Workshop in
International Minimum Wage Experience. Gauteng, South Africa (pp. 20-21).
McKenzie, D., Theoharides, C. and Yang, D., 2014. Distortions in the international migrant labor
market: evidence from Filipino migration and wage responses to destination country economic
shocks. American Economic Journal: Applied Economics, 6(2), pp.49-75.
Odeh, O., 2015. The Effect of Trade Openness on Income Inequality Selected Latin American
Countries (Master's thesis, Eastern Mediterranean University (EMU)-Doğu Akdeniz Üniversitesi
(DAÜ)).
Oecd.org. (2020). https://www.oecd.org/economy/surveys-2019-OECD-economic-survey-
overview.pdf
Tsaurai, K., 2018. Does trade openness and foreign direct investment complement or substitute
each other in poverty alleviation?. Euro Economica, 37(1), pp.223-236.
Wahiba, N.F., 2015. Trade openness and inequality. Journal of Knowledge Management,
Economics and Information Technology, 3(6), pp.1-12.
Yang, Y. and Greaney, T.M., 2017. Economic growth and income inequality in the Asia-Pacific
region: A comparative study of China, Japan, South Korea, and the United States. Journal of
Asian Economics, 48, pp.6-22.
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