The Theory II: The Adjustment Process

Abstract

A comparison between the output and consumption patterns of two nations in autarky and under conditions of full trade does provide a basis for proving the existence of gains from trade and for estimating the distribution of those gains between nations. The comparison also allows for the income-distributional effects of the inauguration of international trade to be analysed. However, the comparison is based upon a gross disturbance and there can be no certainty, in a multi-commodity model, that the rank-ordering of goods (by comparative advantage) under autarkic conditions does not change to an important degree during the process of transition from autarky to full trade. The implications of changes in the rank ordering of goods are that any conclusions drawn from the model about the mix or structure of international trade must be hedged in with caveats. For example, a good that appeared in autarky to be an exportable might, under conditions of full trade, turn out to have such inelastic domestic supply and such a high domestic income elasticity of demand that the good is, in fact, imported. These reservations about the validity of the comparison also apply when the analysis is applied to income-distributional questions and the strong factor-intensity assumption is not imposed upon the analysis — as would be foolhardy in a multi-factor world in which not all factors are used in all goods.