Gains from trade without lump-sum compensation
TL;DR: In this paper, the authors examined the possibility of designing a free-trade equilibrium that is Pareto superior to a given autarkic one, using redistributive tools other than lump-sum transfers.
About: This article is published in Journal of International Economics.The article was published on 1986-08-01. It has received 173 citations till now. The article focuses on the topics: Gains from trade & Autarky.
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TL;DR: In fact, if one focuses on merchandise trade relative to value-added, the world is much more integrated today than at any time during the past century as mentioned in this paper, which is not surprising in view of the fact that large economies trade less with others, and more internally.
Abstract: The last few decades have seen a spectacular integration of the global economy through trade. The share of imports (or exports) in GDP for the United States has approximately doubled in the last two decades, and if intra-OECD trade is omitted, the same is true for the OECD countries generally. Trade does remain a seemingly small fraction of U.S. GDP. This is not surprising in view of the fact that large economies trade less with others, and more internally. But the modest share of trade in total national income hides the fact that merchandise trade as a share of merchandise value-added is quite high for the United States and the OECD, and has been growing dramatically. In fact, if one focuses on merchandise trade relative to value-added, the world is much more integrated today than at any time during the past century. The rising integration of world markets has brought with it a disintegration of the production process, in which manufacturing or services activities done abroad are combined with those performed at home. Companies are now finding it profitable to outsource increasing amounts of the production process, a process which can happen either domestically or abroad. This represents a breakdown in the vertically-integrated mode of production—the so-called ‘‘Fordist’’ production, exemplified by the automobile industry—on which American manufacturing was built. A number of prominent researchers have referred to the importance of the idea that production occurs internationally: Bhagwati and Dehejia (1994) call this ‘‘kaleidoscope comparative advantage,’’ as firms shift location quickly; Krugman
2,038 citations
Cites background from "Gains from trade without lump-sum c..."
...Dixit and Norman (1986) have shown that a system of tax and subsidies on all goods and factors,...
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...Dixit and Norman (1986) have shown that a system of tax and subsidies on all goods and factors, combined with a poll subsidy, can be used to obtain Pareto gains from trade, without requiring a mechanism for revelation of private information....
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Book•
01 Jan 2004
TL;DR: The Advanced International Trade (AIT) as discussed by the authors is a classic graduate textbook in international trade that has been used widely by students and practitioners of economics for a long time to come.
Abstract: Trade is a cornerstone concept in economics worldwide. This updated second edition of the essential graduate textbook in international trade brings readers to the forefront of knowledge in the field and prepares students to undertake their own research. In Advanced International Trade, Robert Feenstra integrates the most current theoretical approaches with empirical evidence, and these materials are supplemented in each chapter by theoretical and empirical exercises.Feenstra explores a wealth of material, such as the Ricardian and Heckscher-Ohlin models, extensions to many goods and factors, and the role of tariffs, quotas, and other trade policies. He examines imperfect competition, offshoring, political economy, multinationals, endogenous growth, the gravity equation, and the organization of the firm in international trade. Feenstra also includes a new chapter on monopolistic competition with heterogeneous firms, with many applications of that model. In addition to known results, the book looks at some particularly important unpublished results by various authors. Two appendices draw on index numbers and discrete choice models to describe methods applicable to research problems in international trade. Completely revised with the latest developments and brand-new materials, Advanced International Trade is a classic textbook that will be used widely by students and practitioners of economics for a long time to come.Updated second edition of the essential graduate textbookCurrent approaches and a new chapter on monopolistic competition with heterogeneous firmsSupplementary materials in each chapterTheoretical and empirical exercisesTwo appendices describe methods for international trade researchSolutions manual available to professorsProfessors: A supplementary Solutions Manual is available for this book. It is restricted to teachers using the text in courses.
1,699 citations
TL;DR: The authors provides a critical look at recent empirical work in international trade theory and addresses the issue of why empirical work has perhaps not been as influential as it could have been, and also provides several suggestions on directions for future empirical research in International Trade.
Abstract: This paper provides a critical look at recent empirical work in international trade theory. The paper addresses the issue of why empirical work in international trade has perhaps not been as influential as it could have been. The paper also provides several suggestions on directions for future empirical research in international trade.
960 citations
Book•
01 Feb 2002
TL;DR: In this article, the authors argue that the poverty impact of trade liberalization is extremely country specific, being propoor in some cases and anti-poor in others, and they believe that it is better to tackle poverty concerns directly (for example, by safety nets and investments to facilitate structural reform) rather than through the continuation of protectionist policies.
Abstract: Sponsored by the UK Department for International Development, this book deals directly with concerns that reform may have adverse effects on poverty in developing countries. The first part of the book recaps the current debates over trade policy and anti-poverty policy and the connections between them. The second part explores ten areas of trade policy that are likely to figure in future trade negotiations and examines the possible impact upon poverty in each case. The authors argue that the poverty impact of trade liberalization is extremely country specific, being pro-poor in some cases and anti-poor in others. However, they believe that it is better to tackle poverty concerns directly (for example, by safety nets and investments to facilitate structural reform) rather than through the continuation of protectionist policies. Given the popular suspicions about trade liberalization, this handbook will make an important contribution to debate on globalization and poverty.
421 citations
TL;DR: The authors pointed out that the equivalent of the domestic tax revenues raised by a tariff is transferred as a windfall gain to foreign countries when VEAs are introduced, these agreements are now the preferred means by which countries pursue protectionism.
Abstract: International trade seems to be a subject where the advice of economists is routinely disregarded. Economists are nearly unanimous in their general opposition to protectionism, but the increase in U.S. protection in recent years in such sectors as automobiles, steel, textiles and apparel, machine tools, footwear and semiconductors demonstrates that economists lack political influence on trade policy. The type of protectionism chosen does not follow economists' advice, either. A frequently asked question on undergraduate trade exams is why a small country's welfare losses are less when it curtails imports with a tariff rather than by negotiating "voluntary" export-restraint agreements (VEAs) with foreign suppliers. Even though generations of students have correctly pointed out that the equivalent of the domestic tax revenues raised by a tariff is transferred as a windfall gain to foreign countries when VEAs are introduced, these agreements are now the preferred means by which countries pursue protectionism. Moreover, if the purpose of protection is to redistribute income to producers, production subsidies (financed by lump-sum taxes) dominate both tariffs and import quotas on efficiency grounds, since the consumption costs of protection are avoided. Yet governments generally prefer to assist industries by providing import protection rather than production subsidies. Economists have tended to attribute such disregard for their policy conclusions to a lack of economic education. However, while many consumers still do not seem to
364 citations
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TL;DR: In this paper, the authors examined the desirability of aggregate production efficiency in a wide variety of circumstances provided that taxes are set at the optimal level, and an examination of that optimal tax structure.
Abstract: Theories of optimal production in a planned economy have usually assumed that the tax system can allow the government to achieve any desired redistribution of property.' On the other hand, some recent discussions of public investment criteria have tended to ignore taxation as a complementary method of controlling the economy.2 Although lump sum transfers of the kind required for full optimality3 are not feasible today, commodity and income taxes can certainly be used to increase welfare.4 We shall therefore examine the maximization of social welfare using both taxes and public production as control variables. In doing so, we intend to bring together the theories of taxation, public investment, and welfare economics. There are two main results of the study: the demonstration of the desirability of aggregate production efficiency in a wide variety of circumstances provided that taxes are set at the optimal level; and an examination of that optimal tax structure. It is widely known that aggregate production efficiency is desired as one part of achieving a Pareto optimum. It is also widely known that when the desired Pareto optimum cannot be achieved, aggregate production efficiency may not be desirable. Our conclusion differs from these results in that production efficiency is desirable although a full Pareto optimum is not achieved. In the optimum position, the presence of commodity taxes implies that marginal rates of substitution are not equal to marginal rates of transformation. Furthermore, the absence of lump sum taxes implies that the income distribution is not the best that can be conceived. Yet, the presence of optimal commodity taxes will be shown to imply the desirability of aggregate production efficiency. This result is similar to that derived by Marcel Boiteux, although he considered an economy where lump sum redistributions of income were possible. Boiteux also examined the optimal tax structure that was necessary for this result. The optimal tax structure for the case of a single consumer (or equivalently with lump sum redistribution) has also been examined by Frank * The authors are at Massachusetts Institute of Technology and Nuffield College, Oxford, respectively. During some of the work, Diamond was at Churchill College, Cambridge and Nuffield College, Oxford and Mirrlees was at M.I.T. Earlier versions of this paper were given at Econometric Society winter meetings at Washington and Blaricum, 1967, at the University Social Science Council Conference, Kampala, Uganda, December 1968, and to the Game Theory and Mathematical Economics Seminar, Hebrew University, Jerusalem'i. The authors wish to thank M.A.H. Dempster, D. K. Foley, P. A. Samuelson, K. Shell, and participants in these seminars for helpful discussions on this subject, and referees for valuable comments. Diamond was supported in part by the National Science Foundation under grant GS 1585. The authors bear sole responsibility for opinions and errors. 1 For a discussion of this literature, see Abram Bergson.
1,480 citations
Book•
01 Jan 1980
TL;DR: In this article, the authors expound trade theory emphasizing that a trading equilibrium is general rather than partial, and is often best modelled using dual or envelope functions, and give unified treatments of comparative statics and welfare, sheds new light on the factor-price equalization issue, and treats the modern specific-factor model in parallel with the usual Heckscher-Ohlin one.
Abstract: This book expounds trade theory emphasizing that a trading equilibrium is general rather than partial, and is often best modelled using dual or envelope functions. This yields a compact treatment of standard theory, clarifies some errors and confusions, and produces some new departures. In particular, the book (i) gives unified treatments of comparative statics and welfare, (ii) sheds new light on the factor-price equalization issue, (iii) treats the modern specific-factor model in parallel with the usual Heckscher-Ohlin one, (iv) analyses the balance of payments in general equilibrium with flexible and fixed prices, (v) studies imperfect competition and intra-industry trade.
1,233 citations
Posted Content•
TL;DR: In this article, the problem of using taxation and government production to maximize a social welfare function was studied, and the first-order conditions were derived and the argument for efficiency in aggregate production was considered.
Abstract: set out the problem of using taxation and government production to maximize a social welfare function. We derived the first-order conditions, and considered the argument for efficiency in aggregate production. Here in Part II we consider the structure of optimal taxes in more detail. Part I contained five sections, and Part II begins at Section VI. In the sixth and seventh sections we consider commodity taxation in one- and many-consumer economies. In the eighth section we consider other kinds of taxes; and in the ninth, public consumption. In the tenth section we consider a rigorous treatment of the problem, giving a sufficient condition for the validity of the first-order conditions. To begin, we shall restate the notation and basic problem. Notation
1,050 citations
Posted Content•
800 citations
Posted Content•
TL;DR: In this article, the authors consider the problem of stability of the competitive equilibrium and show that starting from any set of prices other than equilibrium, the prices oscillate without tending towards equilibrium.
Abstract: In this paper we consider the problem of stability of the competitive equilibrium. The market demand functions are sums of individual demand functions obtained directly by utility maximization. The rate of change of the price of each commodity is assumed to be proportional to the excess market demand for that commodity. A number of examples are given for which the motion of the prices is globally unstable in the sense that starting from any set of prices other than equilibrium, the prices oscillate without tending towards equilibrium.
425 citations