Routledge Revivals: International Trade (1986)

Theoretical Issues

Bharat Hazari

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351356961
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1986, this book examines international trade, offering different theories and considering contemporary developments. Professor Hazari connects these theories and developments, such as theories of comparative advantage and factor-price differentials, to economic expansion and terms of international trade. Many key economic problems are related to the theory of international trade, problems such as tariffs, the dependency of developing countries and changing patterns of world trade, and the book shows how theory impinges on these other important issues. The theory of international trade is a popular and widely taught specialism within economics. This book surveys the pure theory which forms the core of the topic.

PART ONE

MICROFOUNDATIONS OF INTERNATIONAL TRADE

1	THE MICROECONOMIC FOUNDATION OF THE PURE THEORY OF INTERNATIONAL TRADE

The object of this chapter is to present the neoclassical theories of the firm and consumer. Several concepts and results of these theories are utilized in the pure theory of international trade. Our treatment of the neoclassical theory of the firm and consumer will not be comprehensive, but will be selective and geared to the needs of the barter theory of trade.¹

It is a well-established tradition in international economics to portray results geometrically² — which implies that one is generally confined to the two-dimensional Euclidean space. This tradition will be followed in this work. Most results will be first derived algebraically, and then developed in geometrical terms. References to the n-dimensional extensions of the work will be provided.³

1.1 The Neoclassical Theory of the Firm

We now proceed to develop the neoclassical theory of the firm. There are three important elements of this theory: (i) the motivation of the firm; (ii) the technology of the firm; and (iii) the institutional setting in which the firm operates. Since our interest in this chapter is in developing the micro-foundations of the barter theory of trade, we shall assume that the firm is motivated by profit maximization and operates in a perfectly competitive environment. Before formally setting up the profit maximization problem we shall discuss the technology of the firm.

1.1.1 Description of Technology

A firm transforms inputs into outputs. This transformation process needs to be represented in a simple and convenient way. Several approaches exist for accomplishing this, for example, by defining production sets and/or by defining production functions.⁴ The concept of a production function is more restrictive than that of a production set. Despite its restrictiveness it is widely used in international economics. Our approach also relies heavily on the concept of a production function.

We shall assume that the firm produces a single output X with the help of two inputs capital (K) and labour (L). The production relationship is written as:

(1.1)

where K and L denote the amount of capital and labour utilized by the firm. To derive interesting results we need to impose restrictions on the production function. These restrictions are spelled out below.

Both the factors of production are assumed to be indispensable in the production process in the following sense:

(1.2)

This restriction implies that both factors of production must be used in positive quantities to obtain a positive output.

The function F is assumed to be homogeneous of degree one in capital (K) and labour (L), which means that if both factors are changed in the same proportion, output also changes by the same proportion. This can be stated mathematically in the following way:

Given the assumption of homogeneity it follows that the average product of labour depends only on the capital–labour ratio, k = K/L. Moreover, the production function can be written in its intensive form, that is, output can be expressed as the product of a scale factor (L) and a function, f, of the capital–labour ratio k:

(1.3)

The marginal product ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Acknowledgements
• Part One: Microfoundations of International Trade
• Part Two: Theories of Comparative Advantage
• Part Three: The Theory of Factor-Price Differentials
• Part Four: Unemployment in Models of International Trade
• Part Five: Non-traded and Intermediate Goods and the Theory of Trade
• Part Six: Tariffs, Quotas and Tariff-related Activities
• Part Seven: Trade Models with Specific Factors and Colonialism
• Part Eight: Dynamic Models of Closed and Open Economies
• Appendix 1. On the Long-run Growth Effects of a Minimum Wage for a Two-sector Economy Pasquale M. Sgro and Akira Takayama
• Appendix 2. Selected References on Other Topics
• Index