5 - COMPARATIVE STATICS

Summary

A number of important questions regarding international trade relate to the effects of changes in the parameters that determine equilibrium prices. Is it necessarily true that a transfer of goods leads to higher welfare for the recipient country? Or could a transfer lead to a deterioration in the recipient's terms of trade sufficient to offset the direct gain from the transfer? Is it necessarily to the advantage of a country to get better production technology, or could this induce terms of trade changes making the country worse off? Is economic growth, in the sense of growth in factor endowments, to the advantage of a country, or is so-called immiserizing growth possible? Is economic growth in one country to the advantage of other countries? Is it to the advantage of both countries to move a factor from a country where its marginal productivity is low to a country where its marginal productivity is higher? To show how answers to such questions can be provided, we must show how parameter changes affect equilibrium prices and utility levels. That is what we do in this chapter. The method is the standard microeconomic one: We take total differentials of the equilibrium equations and solve for changes in prices and utility levels. It will be seen that the formulations adopted in Chapters 2 and 3 make this task much simpler than one might expect.

To avoid unnecessary complications, we shall stick to the simplest version of the catalogue of models set out in Chapter 3