Graham-type Trade Model under the Condition of Full Employment: Ricardian Trade Model with Link Commodities

Hideo Sato

No 372, TERG Discussion Papers from Graduate School of Economics and Management, Tohoku University

Abstract: This paper provides a Graham-type trade model, which is a multi-country multi-commodity Ricardian (one-factor) trade model and attaches great importance to commodities produced in common in more than one country, or link commodities: e.g. automobiles among Japan, USA, and Germany, IT products among Japan, Korea, and China, and beef among Brazil, Australia, and USA. The link commodities determine the relative wage rates of all the countries producing the same link commodities, thereby determining the relative prices of all commodities produced in these countries. Among the pattern of the international division of labor (IDL pattern) formed in the multi-country multi-commodity trade model, the linkage type IDL patterns linking all the countries directly and indirectly is overwhelmingly many, the limbo type IDL patterns having more than one disconnection accounts for a small part, especially one of them, the perfect specialization patterns (PSPs) having no link commodities are uncommon. When small changes in demand occur, quantity adjustments without price changes are conducted among countries linked directly and indirectly (the Graham case), and price adjustments among countries disconnected (the Mill case). Conventional trade theories have focused their attention on the PSP and have not incorporated the link commodities into their models. The link commodities, therefore the quantity adjustments or the Graham case matters. We need to free ourselves from undue emphasis on the PSPs.

Pages: 43 pages
Date: 2017-08
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Persistent link: https://EconPapers.repec.org/RePEc:toh:tergaa:372

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