Theoretical Foundations: A General Equilibrium Approach
The discussions in the subsequent chapters of the book are based mainly on the general equilibrium framework as developed by R.W. Jones in his 1965 and 1971 papers. Graduates and doctoral students are likely to be familiar with the simple general equilibrium theory. However, to have a deeper understanding, they should acquaint themselves with the ‘hat calculus’ developed by Jones. While Jones (1965) deals with the 2 × 2 Heckscher–Ohlin–Samuelson (HOS) model, Jones (1971) is based on the 2 × 3 specific-factor full-employment model. In the next section we intend to present the essence of these two papers in the simplest possible manner. Later we shall discuss the technique of measuring social welfare in a small open economy and its changes resulting from changes in policy parameters.