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The recent literature on the effects of economic expansion on international trade has been concerned with two principal problems: the impact of the expansion on the terms of trade; and the resultant change in the welfare of the trading nations. The solutions offered, however, are not fully satisfactory. Thus H. G. Johnson [5) and W. M. Corden [3], who attempt to tackle the first problem, succeed only in establishing the direction, as distinct from the extent, of the consequential shift in the terms of trade. In so far as the full impact of the expansion on the terms of trade must be known prior to determining the change in the welfare of the countries involved, it is not surprising that the second problem has received scant attention.

It is intended in this paper to resolve principally the problem of bringing the different factors that affect the terms of trade into a single formula to determine the extent of the shift in the terms of trade consequent upon economic expansion. The analysis is further rendered geometrically by translating the usual textbook back-to-back partial diagram, depicting international trade equilibrium in a single commodity, into a general equilibrium framework. The argument is then extended, in a brief section, to the welfare effects of the expansion. To the gain from growth must be added the gain or loss from the resultant shift, if any, in the terms of trade; conditions are derived to determine whether the growing country will experience a net gain or loss from the expansion. The final section of the paper is concerned with the concept of the "output elasticity of supply" (to be used in the paper) and the analytical methods that can be employed to investigate the output elasticity of supply of different activities under specified varieties of expansion.


Economics | International Trade Law | Law


Copyright © 1958 by the American Economic Association.