Stability Conditions in International Trade: A General Equilibrium Analysis

Abstract

DEVELOPMENT OF the theory of international trade has relied heavily on general equilibrium forms of analysis, as exemplified in simple models by use of reciprocal demand curves and transformation schedules. The problem of stability in international trade and the closely related problem of the effect of devaluation on the balance of payments have generally been analyzed, however, by partial equilibrium techniques. The resultant stability conditions in models which disregard the income effects of employment changes involve complicated expressions of demand and supply elasticities for imports and exports. In this article I shall analyze the problem by general equilibrium methods to show that the stability conditions can be stated in a simple form. A general equilibrium expression for stability that isolates the pure demand from the pure supply effects of price changes is developed in the first section of the paper. In Section 2, I shall make explicit the relationship between the stability analysis and two alternative techniques of investigating the effect of changes in exchange rates on the balance of trade. Finally, in Section 3, I compare the general equilibrium results with the familiar Metzler-Robinson-Bickerdike partial equilibrium expression and point out wherein the latter is deficient. The two country, two commodity, purely competitive model of trade with full employment guaranteed by flexible prices is employed throughout the paper.