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Globalization and the gains from international trade - Essay Example

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Globalization and Gains from Trade i) State and explain the classical ‘gains from international trade proposition’ (GFITP). In 1939, Samuelson developed a theorem built around centrally-planned nations, suggesting that free trade is better than autarky…
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Download file to see previous pages Using certain assumptions, Samuelson concluded that although it cannot be illustrated that everyone stands to gain under free trade, it can nevertheless, be proven that no one could be any less worse (Kemp 1995, pp. 3-4). According to him, in a free system, both production and consumption always end up higher than those in autarkic states. A free trade society is better off since the trade frontier rises high above the autarkic frontier on all aspects implying that it can obtain more all of such goods minus some of the tedious inputs (Samuelson 1962, pp. 820-821). Kemp believes that gains in free trade is evinced only if none of the countries within the globalised system is worse off than those in smaller customs unions. Free trade, according to him, is just one of the integral characteristics of globalisation that ultimately gives rise to more global development (Kemp1987). Kemp (1962) expanded on Samuelson’s theory by proving that GTIF is applicable to countries of whatever size under similar assumptions. Using the equation p1 z1 – w1 a1 ? p1 z0 - w1 a0, Kemp concluded that it is impossible to make everyone better off by a mere redistribution of goods under autarky and illustrated, using the same utility curves employed by Samuelson, that free trade is better than autarky (see Fig. 2). ...
Point pp also passes below u1 because it operates under autarkic condition, but point RR, which operates under free-trade, can neither lie inside autarkic levels. In sum, the GFTIP has four core theories, assuming a fixed market with finite numbers of individuals and commodities: free trade is better than no trade, whether an economy is small or big; any improvement in trade is beneficial in the case of small open economies; trade in further products is likewise beneficial for small open economies, and; a relationship involving any trade agreement is mutually beneficial for any subset of trading countries (Kemp 1995, p. 105). ii) Carefully explain and annotate the proof of the classical GFITP provided by Grandmont and McFadden (1972). Why is this proof generally regarded as the first satisfactory proof of the classical gains from international trade proposition? The first satisfactory and complete proof of the classical GFITP is believed to be that propounded by Grandmont and McFadden in 1972. The reason for the long lag of time between proposition and proof lies in technicality: the absence of a lump sum compensated world before World War II (Kemp and Wan 1972). Grandmont and McFadden proved that autarkic countries can subsequently evolve into free trade without harming their consumers through internal financing to ensure, at least, that consumers are not worse off than before. With the classical GFITP reduced into Propositions A and B, Grandmont and McFadden developed a model to prove their validity (1972, p. 110). In the Grandmont-McFadden model, both Propositions A and B assume decentralised and multiple-consumers nations with competitive domestic markets. Proposition A states that “Given a world competitive trade ...Download file to see next pages Read More
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