Date of Submission


Date of Award


Institute Name (Publisher)

Indian Statistical Institute

Document Type

Doctoral Thesis

Degree Name

Doctor of Philosophy

Subject Name

Quantitative Economics


Economic Research Unit (ERU-Kolkata)


Chakraborty, Brati Sankar (ERU-Kolkata; ISI)

Abstract (Summary of the Work)

Trade theorists, have generally been concerned with three basic questions: Why do countries engage in trade? What is the pattern of trade? and What are the gains from trade? These questions have remained the focal point of inquiry from the times of Adam Smith till the present day. The first two questions inquire, respectively about the causes of trade, and if trade indeed takes place, then about the pattern of specialization of each country in the post trade situation. These are thus questions of positive economics. The third point of inquiry is normative. This is because, gains and losses from trade are generally associated with redistribution of income among the various constituent groups of a nation. David Ricardo explained that countries trade because of comparative advantage. Each nation produces the good that it can produce at a lower relative cost. Comparative advantage refers to the ability of a nation, to produce a particular good or service at a lower relative marginal cost over another (nation). Thus as trade opens up, each nation concentrates its resources for production of the good in which it enjoys comparative advantage. This in turn implies that across the nations consumers can avail the goods produced, at the least prices (these models assume markets to be perfectlycompetitive and prices are equated to marginal costs). Thus, classical competitive trade theory sought to explain the pattern of trade with models based on some underlying difference among the nations. In standard Ricardian models, a single factor of production is assumed, and it is the difference of technology, that causes trade. Another standard source of explanation of the phenomenon of international trade is the Heckscher-Ohlin model. Developed by Eli Heckscher and Bertil Ohlin, this model also explains trade via comparative advantage, though positing a different source for it. The source of comparative advantage in this genre of models is the difference in relative factor endowments, and it is predicted that each country would export a good which was intensive in usage of the factor that was relatively abundant in the country. In recent years, another distinct class of models have emerged that explains the phenomenon of international trade invoking the idea, that trade enables more specialized usage of resources which brings efficiency gains to all the trading countries involved, even though they may be similar in terms of their comparative advantage. This idea actually has its origin in the writings of Adam Smith. Adam Smith explained that in all market exchanges, humans have propensity to truck, barter and exchange one thing for other (Wealth of Nations I, ii, 1). Interestingly, he also pointed out that exchange brings about gains from specialization by enhancing the division of labour. He illustrated this point with his famous pin factory example, which showed that the division of labour produces an increase of the quantity of work which the same number of people are capable of performing (Wealth of Nations, I.i.5). This Smithian argument has been employed in trade models, that seek to explain international trade among similar nations.


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