Page 25 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 2 : Measurement of Gains from Trade

Y Notes
P
Export
H L
D IC 2
A IC
1
H Import
D
T

X
O A P
Figure 2.4: Gains from Trade - Haberler’s Approach
On the basis of community IC it has been clarified that point H' is superior to H as at H' higher
indifference curve is tangent at H' than at H. Hence these are gains from international trade. It should
however, be clarified that since Haberler was not in favour of using community indifference curves,
point H1 can prove to be superior to H if H1 is above and to the right of H. In this case at H1 international
trade causes rise in the quantity of both X and Y goods. This is nothing but gain from trade.
Modern Approach (Samuelson’s Approach)

In modern trade theory, the gains from international trade are clearly differentiated between the
gains from exchange and the gains from specialization. The analysis is explained in terms of the
general equilibrium of a closed economy by taking demand and supply. It is characterized by the
tangency of a community indifference curve with the transformation curve, and the equality of the
marginal rates of substitution between commodities in consumption and production with the domestic
terms of trade or commodity price ratio. “The introduction of international trade permiss the realization of
a gain from exchange and gan from specialization. When equilibrium is essablished and these gains are maximized,
the new marginal rate of transformations in production and the new marginal rate of substitution in consumption
are equal to the international price ratio or terms of trade.” Thus, both producers and consumers gain from
international trade by producing and consuming more than the pre-trade level.

Y
P
2
Y P 1 C
Commodity 1
C
P
A IC 2
D IC 1
E
IC
E 0
Z 1

X
O B
Figure 2.5: Gains from Trade-Samuelson’s Approach

LOVELY PROFESSIONAL UNIVERSITY 19