Discussion

Summary

In his wide-ranging and characteristically thought-provoking chapter 5, Dani Rodrik tackles several aspects of the controversial relationship between global integration and inequality.

Many trade economists argue that trade has a small effect on income distribution, and Dani Rodrik opens with the observation that this implies a belief that trade has a small effect on welfare. Now income distribution and welfare are not the same, but it is true that in the standard models in which comparative advantage derives from the factor endowments of countries and the factor intensities of products, large differences in factor endowments between countries and in factor intensities between products imply that trade will cause large changes both in welfare and in income distribution. More briefly, with given factor endowments, changes in real national income will be associated with changes in the distribution of that income.

However, the loaded phrase ‘saying that in practice the gains from trade amount to little more than peanuts’ implies that economists characteristically argue that the gains from trade are large. In fact, it is the longstanding conventional wisdom in the welfare economics of trade that in the standard trade model, the gains from trade are indeed small, whether represented by triangles in partial equilibrium models or the curvature of transformation surfaces in general equilibrium models.