A Two Sector General Equilibrium Model of an Economy
This chapter provides a simple and systematic treatment of a twocommodity (two-sector), two-factor general equilibrium model of a closed economy which is widely used in several real models of trade.1 This model is the cornerstone of the Heckscher-Ohlin, the Ricardo-Samuelson-Viner, the Harris-Todaro and many other models of trade.2 This framework can be extended to analyse many interesting problems in economics. More importantly it is utilised in the trade and distortion literature for deriving optimal policies and other important results. This chapter is motivated by the desire to make this book as self contained as possible so that the reader does not have to search for background material in various other books or journals. The model is presented in both the primal and dual forms which are widely used in this work and trade literature.
KeywordsCommodity Price Factor Endowment Indirect Utility Function Revenue Function Factor Reward
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- 1.The term ‘real’ or ‘pure’ is used to emphasise the fact that these models are not concerned with any monetary phenomem.Google Scholar
- 2.Some of the trade theorems have been extended to the n X n framework. This book will not be concerned with such extensions. References for this line of work include Ethier (1974), Kemp and Wan (1976), Sgro (1980), Uekawa (1971) and Uekawa, Kemp and Wegge (1973).Google Scholar
- 3.See the paper by Samuelson (1956) on this issue.Google Scholar
- 4.On the nature of value judgements involved, both in general, and in economics, see for example Hare (1964,65), Pattanaik (1971), Sen (1970) and Kolm (1996).Google Scholar
- 5.See Melvin (1974).Google Scholar
- 6.A large body of literature on this subject exists which was pioneered by the work of Minhas (1962). A treatment of this subject is available in the book by Gandolfo (1998).Google Scholar
- 7.The production possibility curve is generally derived with the help of the EdgeworthBowley box diagram using the Savosnick technique (1958).Google Scholar
- 8.See for example Bhagwati and Srinivasan (1971).Google Scholar