Gains from trade

Gains from trade in economics refers to net benefits to agents from voluntary trading with each other. It is commonly described as resulting from:
* specialization in production from division of labor and economies of scale [Krugman (1981), p. 959.] and in types of output by farms, businesses, economies, etc.
* a resulting increase in total output possibilities
* trade through markets from sale of one type of output for other, more highly valued goods. [Samuelson and Nordhaus (2004), ch. 2, "Trade, Specialization, and Division of Labor" section.] Market incentives, such as reflected in prices of outputs and inputs, are theorized to attract factors of production, including labor, into activities according to comparative advantage, that is, for which they each have a low opportunity cost(this here is wrong. Comparative advantage has nothing to do with low opportunity cost per se.). The factor owners then use their increased income from such specialization to buy more-valued goods of which they would otherwise be high-cost producers, hence their "gains from trade". The concept may be applied to an entire economy for the alternatives of autarky (no trade) or trade. A measure of total gains from trade is the sum of consumer surplus and producer profits or, more roughly, the increased output from specialization in production with resulting trade. [Samuelson and Nordhaus (2004), ch. 12, 15, "Comparative Advantage among Nations" section," "Glossary of Terms," Gains from trade.] Gains from trade may also refer to net benefits to a country from lowering barriers to trade such as tariffs on imports. [Deardorff (2006), "Gains from trade."]

From publication of Adam Smith's "Wealth of Nations" in 1776, it has been widely argued, that, with competition and absent market distortions, such gains are positive in moving toward free trade and away from autarky or prohibitively high import tariffs. Rigorous early statements of the conditions under which this proposition holds are found in Samuelson (1939, 1962) (Deardorff, 2006). For the analytically tractable general case of Arrow-Debreu goods, formal proofs came in 1972 for determining the condition of no losers in moving from autarky toward free trade. It does not follow that no tariffs are the best an economy could do. Rather, a large economy might be able to set taxes and subsidies to its benefit at the expense of other economies. Later results of Kemp and others showed that in an Arrow-Debreu world with a system of lump-sum compensatory mechanisms, corresponding to a customs union for a given subset set of countries (described by free trade among a group of economies and a common set of tariffs), there is a common set of "world"' tariffs such that no country would be worse off than in the smaller customs union. The suggestion is that if a customs union has advantages for an economy, there is a world-wide customs union that is at least as good for each country in the world. [Kemp (1987).]

Notes

References

* Jagdish N. Bhagwati, Arvind Panagariya, and T. N. Srinivasan (1998, 2nd ed.). [http://books.google.com/books?id=zKC6EsxVb8kC&pg=PA281&lpg=PA281&dq=%22gains+from+trade%22&source=web&ots=ok9IsgHkQ4&sig=Pdx9L5st4UcMo21exz2cCLpwN0U&hl=en#PPA281,M1 "Lectures on International Trade] ", ch. 18 & 19, pp. 265-79.
* Alan V. Deardorff (2006). : [http://www-personal.umich.edu/~alandear/glossary/ "Terms of Trade: Glossary of International Economics] ", "Gains from trade" and "Gains from trade theorem" (located by clicking 'G').
* Giovanni Facchini and Gerald Willmann (2001) "Pareto Gains from Trade," "Economia Politica", pp. 207-216. [http://willmann.bwl.uni-kiel.de/~gerald/gft.pdf Literature review, 1999 prepublication version.]
* Murray C. Kemp (1987). "gains from trade," "", v. 2, pp. 453-54.
* _____ (1995). [http://books.google.com/books?hl=en&id=DHib6oy1bCIC&dq=%22Gains+from+trade%22&printsec=frontcover&source=web&ots=Fwgk1ZXuBE&sig=B4CQVaysGvWw7JPSgjwA1RMzF-Q&prev=http://www.google.com/search?hl=en&q=%22Gains+from+trade%22&btnG=Google+Search&sa=X&oi=print&ct=result&cd=2&cad=bottom-3results#PPT1,M1 The Gains from Trade and the Gains From Aid: Essays in International Trade Theory.]
* Paul R. Krugman (1981). "Intraindustry Specialization and the Gains from Trade," "Journal of Political Economy", 89(5), p [http://links.jstor.org/sici?sici=0022-3808%28198110%2989%3A5%3C959%3AISATGF%3E2.0.CO%3B2-W&size=LARGE&origin=JSTOR-enlargePage p. 959] -973.
* _____ ( 1987). "Is Free Trade Passé?" "Journal of Economic Perspectives", 1(2), p [http://links.jstor.org/sici?sici=0895-3309%28198723%291%3A2%3C131%3AIFTP%3E2.0.CO%3B2-F&size=LARGE&origin=JSTOR-enlargePage p. 131] -144.
* Joy Mazumdar (1996). "Do Static Gains from Trade Lead to Medium-Run Growth?" "Journal of Political Economy", 104(6), 1996, p [http://links.jstor.org/sici?sici=0022-3808%28199612%29104%3A6%3C1328%3ADSGFTL%3E2.0.CO%3B2-Y&size=LARGE&origin=JSTOR-enlargePage p. 1328] -1337.
* Paul A. Samuelson (1939). "The Gains from International Trade," "Canadian Journal of Economics and Political Science" 5, p [http://links.jstor.org/sici?sici=0315-4890%28193905%295%3A2%3C195%3ATGFIT%3E2.0.CO%3B2-L&size=LARGE&origin=JSTOR-enlargePage p. 195] -205.
* _____ (1962). "The Gains from International Trade Once Again," "Economic Journal", 72(288), p [http://links.jstor.org/sici?sici=0013-0133%28196212%2972%3A288%3C820%3ATGFITO%3E2.0.CO%3B2-B&size=LARGE&origin=JSTOR-enlargePage p. 820] -829.
* Paul A. Samuelson and William D. Nordhaus (2004). "Economics", McGraw-Hill.

External links

* [http://nova.umuc.edu/~black/compad40.html Gains from Trade,] "The Economics Net-TextBook" (2005)
* [http://arnoldkling.com/econ/markets/trade.html Gains from Trade] , from "International Trade," Arnold Kling
* [http://www.econ.rochester.edu/eco108/ch9/summ9.html Summary: Main Points on Economic Efficiency and the Gains from Trade] , including graphs for consumer surplus and producer surplus