On the Loss from Trade

31 Pages Posted: 24 Mar 2013 Last revised: 2 Jan 2014

Date Written: January 1, 2014


Consider models of international trade in which capital goods are produced, not given as an unproduced endowment, and in which equilibrium interest rates are positive. A positive interest rate, in such a model, acts as a price distortion. Consequently, the gains of trade for a single country, when comparing stationary states with and without trade, can be negative. Even with no failures of competition in domestic or international markets; no government interventions such as tariffs; and no dynamic changes to technology, as considered in cases of infant industries, a policy of free trade can result in a country being worse off under textbook assumptions. Previous authors have drawn this result in models with production depicted as a circular process, even though their point does not depend on this modeling choice. The principle contributions of this paper are to provide a demonstration of the possibility of such a loss from trade in a simplified model with “a one-way avenue ... lead[ing] from ‘Factors of production’ to ‘Consumption goods’” and to illustrate the model with a concrete numerical example. The theory of comparative advantage is not sufficient to justify the advocacy of free trade in consumer goods, even under textbook assumptions.

Keywords: Sraffian Economics, Capital Theory, International Trade

JEL Classification: B51, D24, E22, F10

Suggested Citation

Vienneau, Robert L., On the Loss from Trade (January 1, 2014). Available at SSRN: https://ssrn.com/abstract=2237279 or http://dx.doi.org/10.2139/ssrn.2237279

Robert L. Vienneau (Contact Author)

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