Chapter 3 - The gains from trade: A partial equilibrium view. After completing this chapter, students will be able to: Introduce the general equilibrium model of international trade, first in its “small country” version and then in its “two-country” version; use the small country model to make it very clear that imports and exports are closely related; reducing imports inevitably causes a reduction in exports;. | The Gains from Trade: A General Equilibrium View Between a good and a bad economist this constitutes the whole difference–the one takes account of the visible effect; the other takes account of both of the effects which are seen, and also of those which it is necessary to foresee. (Frédéric Bastiat) The Goals of this Chapter Introduce the general equilibrium model of international trade, first in its “small country” version and then in its “two-country” version. Use the small country model to make it very clear that imports and exports are closely related; reducing imports inevitably causes a reduction in exports. Use the two-country model to show how trade affects both the domestic and foreign economies by shifting output and consumption and raising real output and income in both countries. Show how increasing returns to scale provide a second source of potential gains from trade. The Example of the Nebraska Auto Industry International trade reduces the opportunity costs of indirectly producing importable products. The general equilibrium model of this chapter will show that protecting import-competing industries reduces production in export industries. The model makes it clear that trade restrictions are not an issue of favoring domestic interests over foreign interests, but an issue of favoring some domestic interests over other domestic interests. The “Small-Country” General Equilibrium Model The small-country model assumes that the actions of its citizens have no noticeable effects on foreign prices or the quantities produced by foreign industries. The model’s general equilibrium nature means that it traces the effects of an economic change to all sectors of the domestic economy. To enable us to use two-dimensional diagrams, the model assumes that there are just two industries in the economy. The model uses a production possibilities frontier to represent the supply side of the economy. It uses indifference curves to represent consumer preferences and the . | The Gains from Trade: A General Equilibrium View Between a good and a bad economist this constitutes the whole difference–the one takes account of the visible effect; the other takes account of both of the effects which are seen, and also of those which it is necessary to foresee. (Frédéric Bastiat) The Goals of this Chapter Introduce the general equilibrium model of international trade, first in its “small country” version and then in its “two-country” version. Use the small country model to make it very clear that imports and exports are closely related; reducing imports inevitably causes a reduction in exports. Use the two-country model to show how trade affects both the domestic and foreign economies by shifting output and consumption and raising real output and income in both countries. Show how increasing returns to scale provide a second source of potential gains from trade. The Example of the Nebraska Auto Industry International trade reduces the opportunity costs of .
