Gains from trade, illustrated

Dream academic paper of the day, by Assaf Zimring. A perfect article to teach to introductory students.

Gains from Trade: Lessons from the 2007-2010 Gaza Blockade

This paper uses detailed household expenditure and firm production data to study the welfare consequences of the blockade on the Gaza Strip between 2007 and 2010. Using the West Bank as a counterfactual, I find that being removed from world markets reduced welfare by 17%-28% on average. Moreover, households with larger pre-blockade expenditure levels experienced disproportionally larger welfare losses. These effects are substantially larger than the predictions of standard trade models. I show that this discrepancy is due to a combination of resource reallocation and reduced productivity. Using firm level data I find that the blockade triggered reallocation of workers across firms and sectors, especially from manufacturing and into services, and from industries that use imported inputs intensively, or export. In addition, labor productivity fell sharply by 24%-29%. This decline was however significantly higher in manufacturing (45%) than in services (5%).

Adverse selection, illustrated

Man divorces and sues wife for ugly baby

The northern Chinese man, Jian Feng, married his wife and was reportedly absolutely in love with her. Soon, as will happen, she became pregnant and gave birth to a baby girl, which was when the problems arose for Feng. He thought the baby was incredibly ugly, to the point where it horrified him. The baby resembled neither of her parents, so Feng demanded to know who the father was, because jumping to conclusions about your wife’s faithfulness is the obvious thing to do when you have an ugly baby. 

As it turns out, his wife didn’t cheat, but did gloss over the fact that she had spent $100,000 on intense plastic surgery to severely change how she looked before she met him. It’s the kind of thing that can slip your mind on the first date. After his wife revealed this to him, Feng took the only right-minded course of action and divorced and sued her, claiming that she got him to marry her under false pretences. The false pretence presumably being that she was good looking. Incredibly, the (presumably male) judge sympathised with Feng and he won $120,000 in the case.

Comparative advantage, illustrated