Introduction

Abstract

The issue of international trade and economic development is a well-discussed area among economists, policymakers and common persons. However, when we are interested to examine the true impact of different policies on different sectors of an economy, this issue is not confined to a discussion at the popular level. In fact, to chalk out the impact of different policies and their effects on the economy's welfare, we need a well-framed model for a developing economy taking into account interactions among different sectors. General equilibrium modelling is a type of framework which can address inter-linkages among sectors on the one hand and can examine the impact of different types of policies on the economy as a whole on the other hand. In particular, it covers issues that are related to the impact of policies on variables like income, employment, inequality and welfare, and for this a multi-sector general equilibrium model is more appropriate to handle the policy impacts compared to a partial equilibrium model. The linkages between international trade and economic development in the era of globalisation can be best captured by theoretical frameworks that are based on general equilibrium trade models which are not only multi-sector in nature but also have features which have a close resemblance with that of real life so far as developing economies are concerned. The linkage between international trade and economic development in the majority of the works ultimately boils down to an analysis of different domestic and trade policies on welfare. These multi-sector models usually consider the economy as a small open one so that the economy is a price taker in the world market, production function in each sector exhibits constant returns to scale, the competitive equilibrium conditions explain the price system and the endowment allocation conditions explain the factor market equilibrium conditions. The existence of non-traded final goods and intermediate goods implies the price of the product of this sector is determined endogenously. The common way to capture different policies is to consider small shocks (also known as infinitesimal changes) in the general equilibrium system to examine the impact on sectoral output levels, employment, welfare and unemployment. Welfare in all these models is captured either in terms of a quasi-concave social welfare function or in terms of national income measured at domestic prices as a proxy for welfare.