TITLE:
Ricardo Revisited: Benefits from Trade and the Role of Non-Convex Technologies
AUTHORS:
Jean-Paul Chavas, Taylor Hall
KEYWORDS:
Ricardo, Globalization, Gains from Trade, Non-Convexity
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.2,
February
28,
2017
ABSTRACT: This paper explores the aggregate gains from trade
with a focus on the role of non-convexity. After reviewing the example
presented by Ricardo, we develop a general equilibrium model of trade under
non-convex technologies and heterogeneous firms. The model is used to evaluate
aggregate efficiency, with a focus on the case where trade restrictions are the
only source of inefficiency. The analysis allows for non-linear pricing which becomes
an integral part of efficiency under non-convex technologies. We establish
bounds on the gains from trade. We show that the gains from trade are
non-negative and that they tend to be small under convexity but can become
large under non-convexity. This indicates that the search for larger gains from
trade needs to be associated with non-convex technologies. Implications of our
analysis for the benefits of globalization are discussed.