Gains from Trade | International Economics: An Introduction to Theory and Policy (2024)

International Economics: An Introduction to Theory and Policy (2nd edn)

Rajat Acharyya

Published:

2023

Online ISBN:

9780191955549

Print ISBN:

9780192865144

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International Economics: An Introduction to Theory and Policy (2nd edn)

Rajat Acharyya

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Rajat Acharyya

Rajat Acharyya

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Pages

22–43

  • Published:

    January 2023

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Acharyya, Rajat, 'Gains from Trade', International Economics: An Introduction to Theory and Policy, 2nd edn (Oxford, 2023; online edn, Oxford Academic, 20 Apr. 2023), https://doi.org/10.1093/oso/9780192865144.003.0002, accessed 10 July 2024.

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Abstract

This chapter discusses the normative aspect of international trade and exchange, viz., the Gains from Trade Theorem which is the essence of Ricardo’s doctrine of comparative cost advantage. It demonstrates that if each country exports the good in which it has a comparative (cost) advantage then trade is a positive-sum game. That is, free trade is beneficial for all the trading partners. Gain from trade is not a Pareto statement though, since trade creates both winners and losers. It only ensures that if a compensation principle is applied whereby gains are forced to compensate losers for their losses, then free trade is Pareto superior to autarchy or no trade. Sources of such gains from trade are discussed and illustrated by decomposing the overall gain into consumption (or exchange) gain and production (or specialization) gain. But, gains from trade may not always be realized and this chapter provides the sufficient conditions for gains from trade in terms of tangency and convexity conditions, and highlights the role of technology (or returns to scale) in this context.

Keywords: Walras’ Law, Production possibility frontier, community indifference curve, Gains from trade, Exchange gain, Specialization gain, Exchange economy, Tangency condition, Convexity condition

Subject

International Economics

Collection: Oxford Scholarship Online

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