The Theory II: The Adjustment Process

  • H. Peter Gray


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.


International Trade Factor Price International Competitiveness General Disturbance Foreign Demand 
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  1. 5.
    See R. F. Kahn, ‘Tariffs and the Terms of Trade’, Review of Economic Studies 16, (1947–48), pp. 14–19.Google Scholar
  2. 6.
    See F. Y. Edgeworth, ‘The Theory of International Values II’, Economic Journal 4, (September 1894), pp. 424–5: ‘A movement along a supply-and-demand curve of international trade should be considered as attended with rearrangements of internal trade; as the movement of a hand of a clock corresponds to considerable unseen movements of the machinery.’CrossRefGoogle Scholar
  3. 7.
    See Louis and Frances Ferguson Esposito, ‘Foreign Competition and Domestic Industry Profitability’, Review of Economics and Statistics LIII, (November 1971), pp. 343–53.Google Scholar
  4. 13.
    See Jacob Viner, Studies in the Theory of International Trade (New York: Harper, 1937), pp. 555–8 for a review of this question. Most variations involve the inadequacy of the concept of net barter terms of trade and the argument introduced here is not considered by Viner.Google Scholar
  5. 2.
    Johnson, ‘Optimum Tariffs and Retaliation’, in International Trade and Economic Growth, ( London: George Allen and Unwin, 1958 ), pp. 31–61.Google Scholar

Copyright information

© H. Peter Gray 1976

Authors and Affiliations

  • H. Peter Gray
    • 1
  1. 1.Belle MeadUSA

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