Domestic Farm Policy and the Gains from Trade: Reply

Abstract

The points raised by Anania and Bohman are interesting and are generally correct. One important extension is the derivation of the linkages between production subsidies and the world market. They show, using partial analysis, that the existence of a no-gains from trade point does not depend on importers' policies nor maintaining the free trade export volume. One can show this result using general equilibrium analysis where the excess supply and demand framework of partial analysis is not needed. Consider figure 1, where there is a production surface representing the output of agriculture and manufacturing available from existing resources. At no trade, production and consumption are at N. With free trade, the terms of trade line becomes P2 where ab represents exports of agricultural products. The gains from trade can easily be measured using compensating or equivalent variation measures. Now consider domestic distortions only (i.e., there are no distortions introduced by the nation importing agricultural products). A production distortion which moves production to A and consumption to C for a price line P, increases the volume of trade, but there are no longer any gains from trade. Consumers are indifferent between trade and no trade if distortions are to remain.