Gains from Trade

As the reader may have noted, while analysing various trade theories which attempt to establish the cause of international trade, in each case we have stated that the discussion on gains from trade will be delayed until this chapter. There are two reasons for this decision: first, it is deemed useful to put together various theoretical results in one chapter; second, the sources of gains from trade crucially depend on the causes of trade. Our discussion will take into account the Ricardian hypothesis, the HOS model (including the Ricardo-Viner model and the neofactor proportions theory), the neotechnology theory, and the various intra-industry trade models. The general theorem on gains from trade is one of the oldest propositions in trade theory. The theorem fundamentally rests on the proposition that international trade provides an expanded consumption-possibility frontier. One needs also to consider the economic situations when the general theorem need not necessarily hold. Certain problems may arise when, for example, the economy is characterised by domestic distortions or the economy comes to possess temporary monopoly of a newly invented product not yet known in the rest of the world. There are also important considerations regarding dynamic gains from trade which need to be explained. Lastly the reader should note that this chapter assumes full theoretical knowledge of the theories covered in the previous chapters.