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Notes
The move from \(\hat{P}\)to\(\widehat{{\hat{P} }}\) “is small” but necessarily shown geometrically as “large”.
The investigation of these sufficiency restrictions, for both gross output changes and value added changes in very general models is to be found in Bruno (1973), Bhagwati and Srinivasan(1973), Sendo (1974). There is a great body of literature on this subject, preceding these writings, but it is in partial-equilibrium models or deals with general-equilibrium models with simplifying restrictions on the tariff structure or on the production functions, thus reaching conclusions which were dependent on the simplifying assumptions whose general implications were not sufficiently appreciated.
Besides, as Bhagwati and Srinivasan (1971) and Herberg and Kemp (1971) have noted multiple equilibria may result, so that another \(\hat{P}*\) may exist to the left of \(\hat{P}\) on \(A\hat{P}B\) as well.
With an ad valorem distortion in consumption, there is a monotonic relationship between shifts in the availability locus at given world prices and the change in social utility, given a well-behaved social utility function.
Evidently, with the trade distortion assumed fixed, we cannot assume the marginal shift in resource allocation to arise from a trade policy change (e.g. tariff reduction).
While this explicit DRC formulation is, to our knowledge, first put down in: Srinivasan and Jagdish (1978)), the notion of appropriate second-best factor prices is of course to be found in the analyses of project evaluation.
When one of the shadow prices is negative, a public sector activity that simply withdraws the factor from private use even if it does not produce any output is welfare-improving. If, however, the production functions are such that positive output can be produced using positive amount of either factor and none of the other, then through such a production activity using the factor (with the negative shadow price) withdrawn from private use, public production can improve welfare even further. For a discussion of negative shadow factor prices, see Srinivasan and Jagdish (1978).
Shadow factor prices in the presence of three different types of factor market imperfections have been considered in Srinivasan and Jagdish (1978).
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Acknowledgements
Thanks are due to the National Science Foundation, Grant no. SOC 77-07188 for financial support of the first author’s research. The views expressed do not necessarily reflect those of the institutions to which the authors are affiliated. The authors are Ford International Professor of Economics at M.I.T., and Professor of Economics at I.S.I. and Senior Adviser, World Bank, respectively.
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Reprint of “On Inferring Resource-Allocational Implications From DRC Calculations In Trade-Distorted Small Open Economies”, by J. N. Bhagwati and T. N. Srinivasan, 1979, Indian Economic Review, New Series, Vol. 14, pp. 1–16. Copyright 1979. Published by Department of Economics, Delhi School of Economics, University of Delhi. Reprinted with permission.
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Bhagwati, J.N., Srinivasan, T.N. On inferring resource-allocational implications from DRC calculations in trade-distorted small open economies. Ind. Econ. Rev. 54 (Suppl 1), 75–88 (2019). https://doi.org/10.1007/s41775-019-00071-4
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DOI: https://doi.org/10.1007/s41775-019-00071-4