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Trade uncertainty and specialization. Social versus private planning

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Summary

A small trading economy which produces and trades an arbitrary, but finite, number of goods and faces given terms of trade in combination with an uncertain volume of trade is studied. An exogenous probability of trade disruption forces both public and private decision-makers to specialize to a lesser extent in accordance with their comparative advantage. A unique optimal point of production exists for each probability of trade disruption. A private competitive economy will not produce at this point: it produces too much of the good with a comparative advantage.

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Abbreviations

C 2 :

class of twice continuously differentiable functions

C i :

consumption of goodi

f:

free-trade utility function

g :

autarky utility function

p :

international relative price of goody

p d :

domestic relative price of goody

Q :

solution set of Ψ

U :

utility function

U :

marginal utility of goodi

U x :

marginal utilities of lastn goods

x :

goodx

x * :

autarky production of goodx

x :

free-trade production of goodx

x pr :

private production of goodx

x 0 :

optimal production of goodx

x m :

maximal production of goodx

y :

goody

Y :

income function

α:

private economy equilibrium function

β :

difference function

ϕ:

production possibility function

ϕx :

derivative of ϕ

π:

probability that free trade occurs

ϱ:

indirect utility function

Ψ:

solution function to optimality problem

c :

consumption vector

p :

relative price vector

x :

goods vector

t :

transpose

R n+ :

n-dimensional positive orthant

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Author information

Authors and Affiliations

  1. Faculty of Economics, University of Groningen, Groningen

    Charles van Marrewijk

  2. Ministry of Economic Affairs, DG-BEB, The Hague

    Peter A. G. van Bergeijk

Authors
  1. Charles van Marrewijk
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  2. Peter A. G. van Bergeijk
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Additional information

This article communicates the opinion of the author. The views expressed herein are not necessarily shared by his employer.

Comments by Willem Buiter, Casper de Vries and participants at the Buiter Workshop Series at the University of Groningen (May 1989) were very useful.

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van Marrewijk, C., van Bergeijk, P.A.G. Trade uncertainty and specialization. Social versus private planning. De Economist 138, 15–32 (1990). https://doi.org/10.1007/BF01718387

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