The Gains from Trade Liberalization
15 Pages Posted: 1 Jun 2007
Date Written: June 2007
We consider trade liberalization in a multilateral trade model, where countries have identical homothetic tastes but may have different constant returns to scale technologies that produce at least two goods from at least two factors. In this model, we derive the world prices after trade liberalization as the shadow prices for the convex optimization problem that determines Debreu's coefficient of resource utilization or CRU. We introduce the notion of a world equilibrium with transfers and show that the CRU defines a world equilibrium with transfers where all countries are better off in the free trade equilibrium, after trade liberalization, than they were in the distorted world equilibrium. In particular, after trade liberalization, the poor countries of the world are better off in the CRU world equilibrium with transfers than in the free trade world equilibrium without transfers.
Keywords: Standard trade model, Trade liberalization, Globalization, Coefficient of resource utilization
JEL Classification: D51, D58, D61, F11, F13
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