Chapter 9 - Gains from Trade

Abstract

This chapter discusses the gains from trade for a small country. There are gains from international trade in a world of full certainty because trade enlarges the set of consumption opportunities of a country. There are gains from international trade even if large uncertainties are involved. In the case of a small country that does not have any technological uncertainty, it is found that without international trade in goods and securities, this country faces certain commodity prices; the composition of its consumption and production are also state independent and in other words, the country lives in a standard world of full certainty. It is observed that if the country is opened to international trade in commodities with random foreign prices, the proposition states that the country will gain from international trade independently of how wildly foreign prices fluctuate. It is also found that if, in addition, it opens to international trade in equities, it will experience additional welfare gains. It is found that when international trade in equities takes place, one cannot know a priori whether an improvement in the terms of commodity trade of the country leads to a welfare gain or loss, unless the terms of equity trade have not changed.