The Pure Theory of International Trade

Miltiades Chacholiades

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781351475686
• Topic: Business
• Subtopic: International Business
• Index: Business

There has long been a need for a systematic introduction to the modern pure theory of international trade that would take the student through a careful introduction to the tools of analysis and the main logical propositions into the application of the theory to practical problems of international economic policy. Trade theory should be part and parcel of price theory, distinguished only by the fact that other countries form part of the natural opportunities--and natural constraints--that a country confronts in its efforts to bend nature to its desire to produce utility-yielding goods and services; but its exposition is often confused by the attachment of its expositors to obsolete problems and backward analytical techniques.

This book covers in detail classical, neoclassical, and modern theories of international trade, with special attention to problems of equilibrium, growth, and welfare, and discusses the work of all major contributors in this field from Ricardo and Mill through Meade, Heckscher, and Ohlin, to the growth models of Johnson, Solow, and Uzawa. All problems are clearly stated and the easiest and most convenient solutions are sought in each case, with the more technical topics in the field discussed in several chapters and appendixes that may be omitted for less advanced students without interrupting the continuity of the book.

The book's coverage is complete and entirely up-to-date. It is written primarily for advanced undergraduate and graduate courses in international trade, but it will also serve as an important reference tool for professional economists working in this field and will be of considerable interest to students and practitioners dealing with problems of economic development and international business relationships more generally.

III

The Neoclassical Theory

4

Opportunity Cost

The neoclassical theory of international values is based on the fundamental concepts of opportunity cost and social indifference. It is an improvement over the classical theory because it frees the classical conclusions from the restrictive assumption of the labor theory of value. The main architects of the neoclassical theory are Edgeworth, Haberler, Leontief, Lerner, Marshall, and Meade.

The neoclassical theory is discussed in this and the following three chapters. In particular, the present chapter discusses at some length the concept of opportunity cost; chapter 5, the concept of social indifference and comparative advantage ; chapter 6, the problem of general equilibrium ; and chapter 7, the problem of increasing returns.

As discussed in chapter 2, Haberler insisted that the sole purpose of the labor theory of value was to determine the pretrade price ratios in the two countries. By means of the concept of the production-possibilities frontier (or substitution curve, as he called it), he demonstrated that the restrictive assumption of the labor theory of value can be dispensed with “without having to discard the results obtained from it: these will remain, just as a building remains after the scaffolding, having served its purpose, is removed.”¹

Chapter 2 introduced the concept of the production-possibilities frontier but within the context of the labor theory of value. The latter is now being dropped to make room for a more general theory of production. This discussion therefore begins with a brief survey of the theory of production.

1 Production Functions

Consider a firm using two factors of production, labor, L, and land, T, and producing a single output, q. Its production function is merely a statement of the maximum quantity of output that it can produce with any specified quantities of labor and land. This can be expressed algebraically as

q=f(L,T).⁢(4.1)

The production function is a purely physical concept; that is, it is a relationship between the physical quantities of output and input—not their values. The symbol f in equation (4.1) could be thought of as an engineer who could tell us the maximum amount of q that he can possibly produce with given amounts of L and T, irrespective of price.

The production function is usually illustrated graphically by means of the isoquant map, as shown in figure 4.1. Each curve, or isoquant, is the locus of alternative combinations of labor and land, all of which are capable of producing the same amount of output. Once the production function (4.1) is given, an isoquant can be derived by assigning a particular value to q. Equation (4.1 ) then becomes an equation in two variables (L and T) and is graphically depicted by means of an isoquant. Thus, isoquant q₂ is simply the graphical representation of the function f(L, T) = q₂. The totality of all isoquants, which can be derived by assigning different values to q in equation (4.1), is the isoquant map. Therefore, an isoquant map gives, in principle, all the information included in equation (4.1), no more and no less.

Figure 4.1

Qualitatively, an isoquant map looks like an indifference map. However, in the case of an isoquant map, the quantity produced is objectively measurable, whereas in the case of an indifference map, the utility attached to each indifference curve is not objectively measurable.

Isoquants have normally a negative slope—at least within a certain range. Within this range, factors of production are substitutable for one another. The absolute value of ...

Table of contents

• Cover
• Title Page
• Copyright Page
• Contents
• Dedication
• FOREWORD
• PREFACE
• I. Introduction
• II. The Classical Theory
• III. The Neoclassical Theory
• IV. The Modern Theory
• V. Economic Growth and Trade
• VI. Trade and Welfare
• VII. International Trade Policy
• Name Index
• Subject Index