Part IV - Theoretical background

Summary

Chapters 9 – 12 contain analytical foundations for some of the arguments used in the previous three parts of the book. This part complements the earlier chapters and is addressed to readers with an interest in economic theory.

Our main theoretical foundations are provided by the Arrow – Debreu general equilibrium model, as presented, for example, by Arrow and Hahn. This is the standard model for analyzing a market economy and the interaction among its various sectors. These interactions, which are the essence of general equilibrium theory, drive many of our conclusions, particularly those of Chapters 4–7.

The basic general equilibrium framework is amply developed in the literature, so we need not repeat it here. However, there are two recent advances in general equilibrium theory that we use extensively and that are available only in technical journals. The purpose of Part IV is to make these developments accessible to the reader.

One of these developments concerns economies with increasing returns to scale in production. The other concerns North–South trade and the study of the effects of domestic economic structures on the gains and losses from such trade.