7
The International Exchange and The Gains from Trade
1. The Gains-from-Trade Theorem
If the value of free trade consumption at free trade prices exceeds the value of autarky consumption at free trade prices, then the free trade consumption bundle must be preferred to the autarky bundle, because if it were not, consumers would pick the cheaper autarky.
(d) Technologies differ between the two countries.
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12
Solving Equilibrium
II. Production Possibility Frontier
aLX labor required to produce one unit of X aLY labor required to produce one unit of Y
px w X c wpy w Y cwpx w X cpy w Y c
.
8
The International Exchange and The Gains from Trade
Y E
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.
pw
X
9
The International Exchange and The Gains from Trade
associated with the name of David Ricardo, is used to
discuss this. It is assumed that labor is the only factor of production in the model. By difference in technology, we mean that labor productivities differ across countries. International trade occurs based on the difference in labor productivities among countries.
.
2
The International Exchange and The Gains from Trade
I. The Causes of International Trade
1. General Equilibrium in the Closed Economy
.
3
The International Exchange and The Gains from Trade
Y
No
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D
O
.
Q
No
p Image
X
5
The International Exchange and The Gains from Trade
Trading equilibrium conditions:
pw
p
w x
p
w y
MRT
pw
p
w x
p
w y
MRS
p
w x
(
X
p
X c)
p
w y
(Y c
Yp)
.
6Байду номын сангаас
The International Exchange and The Gains from Trade
II. Gains from Trade
Y
O
X
A country to trade at any price ratio other than its
autarky prices t make the country better off.
(a) Labor is the only factor used in production of X and Y;
(b) Labor is perfectly mobile within each country but internationally immobile;
(c) Labor input required per unit of output remain constant;
Y
Autarky equilibrium conditions:
pa
px py
MRT
E
Ua
pa
px py
MRS
p
O
Xc X p
X
Yc Y p
.
4
The International Exchange and The Gains from Trade
2. General Equilibrium in the Open Economy
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11
The Ricardian Model
I. The Basic Framework
In the Ricardian model, there are two sectors (X, Y) and one homogeneous factor, labor, on several assumptions as follows:
2. Decomposition of Trade Gains Y
Uw Ue
Ua
O
.
X
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Chapter 2 Technology and Trade： the Ricardian Model
The role of technology in explaining trade patterns is focus of this chapter. The earliest model of trade, that
International Trade: Theory and Policy
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1
Chapter 1 International Exchange and Gains from Trade
This chapter establishes a fundamental result:
If relative prices differ between countries in the absence of trade, both (all) countries can gain by exchanging commodities at any intermediate price ratio.