Utility Compensation in the Pure Theory of International Trade: An Empirically-Oriented Generalisation

J. Carmichael
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J. Carmichael: Reserve Bank of Australia

Economic Analysis and Policy, 1981, vol. 11, issue 1-2, 3-13

Abstract: One of the cornerstones of the modern welfare approach to international trade theory is the compensation principle due to Samuelson. The difficulty with the compensation principle is that it pays scant attention to the way in which the equilibrium of the system changes when compensation is actually paid. This paper is concerned with the efficient location of the set of the utility-compensated equilibria; that is, the set of equilibria that satisfies the condition that compensation be paid such that no-one is worse off following a particular event or policy change. Using the gains from trade as an example, Dixon’s theory of joint maximisation is shown to be an ideal tool, in an empirically-implementable form, for problems of this type.

Date: 1981
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