Page 27 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 2 : Measurement of Gains from Trade

(c) promote exports over imports because it viewed trade as zero sum, believing that one Notes
nation's gain was another nation's loss.
(d) use tariffs rather than quotas. Because mercantilism views trade as zero sum, transparent
trade barriers are viewed as best.
(ii) Adam Smith was critical of trade barriers, since he believed that trade barriers
(a) Are a good and appropriate source of government revenue.
(b) Reduce specialization, technological progress and wealth creation.
(c) Harm a country's relations with its colonies.
(d) All of the above.
(iii) The Resource Curse refers to the idea that
(a) Countries that focus on a resource, such as oil, may suffer from macroeconomic instability.
(b) Countries that don't have resources, such as oil, are at the mercy of resource-rich countries.
(c) Countries that don't have resources are more likely to have corrupt governments.
(d) Countries that don't have resources may suffer from macroeconomic instability.
(iv) Competitive advantage and comparative advantage will differ for China if
(a) True production costs are inaccurately measured due to production externalities such as
pollution.
(b) None of the above. Competitive advantage and comparative advantage are always the same.
(c) The Chinese currency (the Renimbi) is overvalued.
(d) Both A and B.
(v) When a country trades according to principles of comparative advantage.
(a) Some workers will be hurt due to dislocation. Their loses are so large that it is impossible
to offset these losses through the sharing of the gains from trade.
(b) All workers will lose due to foreign competition.
(c) All workers will gain.
(d) Some workers will be hurt due to dislocation, though their losses could be offset if the
gains from trade were shared.
2.5 Summary

• We proposed a method to measure gains from trade. We avoided interpersonal comparisons of
welfare by denning gains in terms of quantities of goods. To do so, we introduced the notion of
a metric. A metric measures gains from trade by a vector of quantities of goods which can be
saved while keeping each agent’s welfare unaffected. We characterized the family of metrics
satisfying some intuitive properties (Theorem 1). This method of measuring gains is applicable
to a wide variety of settings. It can be interpreted as generalizations of existing measures of
welfare changes in single agent settings to multi-agent settings.
• Then, we proposed an application to fair allocation. Based on Shapley’s algorithm, we obtained
a way of measuring each agent’s contribution to the gains from trade. We declared an allocation
fair if each agent receives her contribution to the gains from trade. We defined a fair allocation
rule that assigns to each agent her contribution. This rule is inefficient, but we show that a
recursive procedure, which is fair at each step of the recursion, yields an efficient rule (Theorem 2).
• Now, we discuss relaxing some of the assumptions. First, we discuss relaxing the assumptions
of boundary aversion and strict monotonicity of preferences. Then, we discuss relaxing some of
the properties on metrics.
• Throughout the paper, we assumed that preferences are strictly monotonic and satisfy boundary
aversion. When preferences fail either of these properties but are (weakly) monotonic, Proposition
1 no longer holds. The sets of possible gains from trade of some economies are not strictly

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