Finite Change—Implication for Trade Theory, Policy and Development
The paper traces the evolution of trade theory beyond the standard 2 × 2 models and looks for implications of higher dimensional structures and adjustment problems with large shocks. Typically trade theory and policy talk about expansion and contraction of existing activities. In this paper we explore various situations where certain activities vanish altogether. Similarly other activities may come to existence following major changes in the economic environment. Such regime shifts are interpreted as finite changes as opposed to infinitesimal alterations. These changes allow us to think differently about standard policy changes, all of which have direct implications for developing countries. Emigration, wage inequality and distribution, non-equivalence of tariff and quota in competitive models, capital mobility and corruption are some of the applications involving such finite change. At a theoretical level the paper starts by an interesting interpretation of factor price “non-equalization” hypothesis in the basic Heckscher-Ohlin-Samuelson type models without depending on standard text book type argument.
KeywordsSkilled Labor Factor Price Wage Distribution Trade Theory Complete Specialization
Comments from K.L. Krishna and T.N. Srinivasan have been extremely helpful. Financial assistance from the RBI endowment at CSSSC is gratefully acknowledged. The usual disclaimer applies.
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