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The Gains from International Trade

Published online by Cambridge University Press:  07 November 2014

Paul A. Samuelson
Paul A. Samuelson*
Affiliation:
Society of Fellows, Harvard University
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[1] In a recent paper the thesis was advanced that while it is not possible to demonstrate rigorously that free trade is better (in some sense) for a country than all other kinds of trade, it nevertheless can be shown conclusively that (in a sense to be defined later) free trade or some trade is to be preferred to no trade at all. I should like here to amplify these remarks with respect to the last point, that some trade is better than no trade.

This is by no means a novel proposition. Indeed, it can be traced back to the beginnings of the Classical theory of international trade. It has become associated, however, quite unnecessarily in my opinion, with a labour theory of value, or a “real cost” theory of value, or more recently, with an opportunity cost theory of value. All of these have come in for considerable criticism in recent years as restrictive special cases of the so-called theory of general equilibrium. Those writers who have insisted on the need for a modern theory of value for a positive description of behaviour in international trade have in general ignored the normative aspects of international trade, presumably in the belief that as soon as one gives up the inadmissible special theories indicated above, nothing can be said concerning this problem. It will be argued here that this is a mistake, that from the most general theories of equilibrtlim all valid normative propositions can be derived.

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Articles
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Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 5 , Issue 2 , May 1939 , pp. 195 - 205
Copyright
Copyright © Canadian Political Science Association 1939

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References

1 Samuelson, P. A., “Welfare Economics and International Trade” (American Economic Review, 06, 1938).Google Scholar

2 A recent exception is provided by Ellsworth's, P. T. International Economics (New York, 1938).Google Scholar However, the problem is posed, not settled. Professor Haberler in his The Theory of International Trade (London, 1936)Google Scholar does not employ a full general equilibrium approach.

3 In a forthcoming paper on the conditions of equilibrium in international trade I have gone more fully into these and other matters.

4 The equality sign can hold if all the x's and a's are respectively proportional (or equal) to the primed x's and a's. In the singular (and rare) case where the preassigned factor prices are such that all factors of production are used in equal proportions by all commodities, it is possible for the equality sign to hold. This constant cost case does not essentially modify the analysis.

5 A trivial exception is provided by the constant cost case mentioned in the previous foot-note. Here at the isolated state prices there might be an unimportant possibility of neutral equilibrium as recognized in the Classical theory of international trade. I adopt the convention of defining trade to exclude this possibility.

6 Cases II, III, and IV are alternative and mutually exclusive possibilities. Hence, although each is consistent with Case I, they are not necessarily consistent with each other.

7 For many reasons I regard the index number approach as a clumsy device for solving the problem at hand. A more convenient test as to the ordinal desirability of two situations is presented in my “Note on the Pure Theory of Consumers' Behavior” (Economica, March, 1938).

8 See Professor Viner's interesting remarks in his Studies in the Theory of International Trade (New York, 1937), pp. 533–4.Google Scholar

9 Mathematically, subject to preassigned outside prices and with preassigned quantities of all productive services, there will result optimal production quantities which are functions of the preassigned variables and satisfy the production limitation of equation [1]. These optimal production quantities will sell for the largest possible total in the outside market, and hence the expression Σp′x is maximized subject to equation [1] and fixed amounts of productive factors. The resulting money sum will be sufficient to permit consumption of goods obeying the condition that all imports must be paid for by exports, or Σp′x=maximum . Because production is optimal, the result is more (or equal) consumption of every good. Moreover, for sufficiently small reductions of all production services, it will still be possible to have more of every commodity, and hence the truth of the third statement follows.