Domestic Distortions

Abstract

Both countries can gain in welfare from international trade between them. The level of welfare in each country is higher than in autarky. The gains from trade in this sense has often been discussed so far. Both England and Poltugal gain in Ricardo’s famous numerical example of cloth and wine trade in Chapter 4. Even Marx admitted that the poorer country, which he believed exploited by the richer country, gains from international trade in Chapter 7. Finally, Meade demonstrated clearly the gains from trade by using his trade indifference curves in Chapter 8. In Figure 11, a trade indifference curve of a country is tangent to her budget line (the balance of trade line) at the point A, which indicates the export of x and the import of y. It is clear that the point A is located on a higher trade indifference than the point O which is the point of the autarky (no trade). To each trade indifference curve we have a corresponding consumption indifference curve. The level of the utility of aggregate consumers is, therefore, higher at point A than at O.