Rights statement: This is the author’s version of a work that was accepted for publication in Economic Modelling. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Economic Modelling, 63, 2017 DOI: 10.1016/j.econmod.2017.02.023
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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Indivisibilities in the Ricardian model of trade
AU - Soo, Kwok Tong
N1 - This is the author’s version of a work that was accepted for publication in Economic Modelling. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Economic Modelling, 63, 2017 DOI: 10.1016/j.econmod.2017.02.023
PY - 2017/6
Y1 - 2017/6
N2 - The idea that goods or factors of production may not be perfectly divisible has important implications for many areas of economics. This paper introduces both types of indivisibilities into the standard Ricardian model of international trade. Indivisibilities give rise to new results compared to the standard model with perfectly divisible goods and factors of production. Both types of indivisibility may result in complete specialisation even in autarky, while goods indivisibility may result in (ex ante) identical consumers consuming different bundles of goods, and hence enjoying different levels of welfare. Both types of indivisibilities lead to efficiency losses relative to the perfectly divisible case. International trade may eliminate efficiency losses resulting from indivisibility in the factors of production, but not those resulting from goods indivisibility. This suggests that the presence of indivisibilities leads to a second-best world, with the consequent implications for policy. The results of the paper are consistent with existing empirical evidence.
AB - The idea that goods or factors of production may not be perfectly divisible has important implications for many areas of economics. This paper introduces both types of indivisibilities into the standard Ricardian model of international trade. Indivisibilities give rise to new results compared to the standard model with perfectly divisible goods and factors of production. Both types of indivisibility may result in complete specialisation even in autarky, while goods indivisibility may result in (ex ante) identical consumers consuming different bundles of goods, and hence enjoying different levels of welfare. Both types of indivisibilities lead to efficiency losses relative to the perfectly divisible case. International trade may eliminate efficiency losses resulting from indivisibility in the factors of production, but not those resulting from goods indivisibility. This suggests that the presence of indivisibilities leads to a second-best world, with the consequent implications for policy. The results of the paper are consistent with existing empirical evidence.
KW - Ricardian model
KW - CES preferences
KW - Indivisible production
KW - Indivisible consumption
U2 - 10.1016/j.econmod.2017.02.023
DO - 10.1016/j.econmod.2017.02.023
M3 - Journal article
VL - 63
SP - 311
EP - 317
JO - Economic Modelling
JF - Economic Modelling
SN - 0264-9993
ER -