Chapter 9 Uncertainty in trade models

Abstract

Publisher Summary The chapter evaluates variety of models, each involving uncertainty in the context of international trade. Uncertainty has many potential roles in microeconomic models of international trade. It creates a rationale for additional markets and hence both added dimensions for potential gains from trade and a plethora of results contingent upon the particular market structure assumed. In addition, uncertainty arises in issues concerning the existence and form of extra market organizations and institutions. The role of uncertainty, and its policy implications, varies both across models of a given type—considering the advisibility of free trade with and without complete markets—and across types of models. For some purposes, results are preserved by treating trade and production in equities rather than in the traditional physical commodities. In other areas, the presence of uncertainty increases the possible explanations of market failure—considering the role of pecuniary externalities with incomplete markets. In addition, uncertainty is linked to the existence and extent of extra market institutions and organizations. The variety of potential models, even within the context of uncertainty and international trade, suggests that it must forgo the comfort of strong conclusions, either positive or normative. The outcome often depends on the extent of markets and/or the extent of extra market institutions, with their implicit patterns of potential externalities—yet perhaps the justification for the study of international economics is that national boundaries do affect the nature and extent of markets and institutions in many ways.