Bibliographical Note to Chapter 6

The principal results of the simple model of international trade-that world prices are associated with maximum consumption and that output prices (with technology) determine input prices-are discussed in Paul Samuelson, "The Gains from International Trade Once Again," Economic journal (December _{1962): 820-29;} and Ronald W. Jones, "The Structure of Simple General Equilibrium Models," Journal of Political Economy 73 (December _{1965): 557-72.} Generalization of the two-good, two-factor model has received substantial attention from international trade theorists. Introductions to and surveys of these results are provided in Ronald W. Jones, "Two-Ness in Trade Theory: Costs and Benefits," Special Papers in International Economics, no. 12 (Princeton, N.J.: Department of Economics, Princeton University, _1977); and Wilfred Ethier, "Higher Dimensional Issues in Trade Theory," chap. ₃ in Handbook of International Economics_, ed. Ronald Jones and Peter Kenen (Amsterdam: North-Holland, 1984)_.

Generalization of the social pricing model requires identification of the optimal set of outputs associated with maximum national income. Arbitrary selection of _n industries (when there are _n factors) creates a large number of potential sets of shadow factor prices: Trent Bertrand, "Shadow Pricing in Distorted Economies," American Economic Review 69 (December 1979): 902-14_. Many economies have industries that exist only because of the support of policy, and inclusion of these industries would generate shadow prices that support inefficient industries. The empirical difficulty is to locate the set of industries that maximizes total consumption. In this maximization process, the quantity produced of each output may not be determinate: Jaroslev Vanek and

Trent Bertrand, "Trade and Factor Prices in a Multi-Commodity World," in Trade, Balance o f Payments and Growth_, ed. Jagdish Bhagwati et al. (Amsterdam: North-Holland, 1971). However, because factor prices depend only on output prices, variations in total production (and in factor endowments) will not affect the factor prices. These arguments and their qualifications are discussed in Jagdish Bhagwati and H. Wan, Jr., "The `Stationarity' of Shadow Prices of Factors in Project Evaluation, with and without Distortions," American Economic Review 69 (June 1979): 261-73.

A second issue, the unique correspondence between output prices and factor prices, has been a principal concern of the literature on Samuelson's factor price equalization theorem. Uniqueness requires restrictions (known as GaleNikaido conditions) on the mathematical properties of the matrix of input-output coefficients. Two survey articles review this literature: Ethier, "Higher Dimensional Issues"; and Ronald W. Jones and J. Peter Neary, "The Positive Theory of International Trade," chap. 1 in Jones and Kenen, Handbook of International Economics.

All empirical estimations of general equilibrium models inevitably require aggregation of commodities into groups, and the literature on aggregation and commodity separability discusses the strong assumptions involved in this exercise. Angus Deaton and John Muellbauer, Economics and Consumer Behavior (New York: Cambridge University Press, 1980), chap. 5, focuses on consumer demand, but necessary production relationships are analogous. A more detailed examination is contained in Charles Blackorby, D. Primont, and R. R. Russell, Duality, Separability and Functional Structure (New York: American Elsevier, 1978).

Analysis of exchange rates and nontradables began to receive increased attention in the 1970s, with the termination of fixed-exchange-rate regimes in most developed countries. Many of the references listed in chapter 5 are relevant here, particularly W. M. Corden, Inflation, Exchange Rates and the World Economy, 3d ed. (Chicago: University of Chicago Press, 1986). Another wideranging discussion of exchange-rate issues is contained in Rudiger Dornbusch, Open Economy Macroeconomics (New York: Basic Books, 1980). Works that emphasize the linkages between exchange rates and nontradable goods are Rudiger Dornbusch, "Devaluation, Money and Nontraded Goods," American Economic Review 73 (December 1973): 871-80; Dornbusch, "Real and Monetary Aspects of the Effects of Exchange Rate Changes," in National Monetary Policies and the International Financial System_, ed R. Z. Aliber (Chicago: University of Chicago Press, 1974), pp. 64-81; and Michael Bruno, "The TwoSector Open Economy and the Real Exchange Rate," American Economic Review 66 (September 1976): 566-77.

The use of world prices as the basis for social prices has also been important in cost-benefit analysis. One of the earliest works is I. M. D. Little and J. A. Mirrlees, Project Apprasial and Planning for Developing Countries (New York: Basic Books, 1974) A summary of this approach is contained in V. Joshi, "The Rationale and Relevance of the Little-Mirrless Criterion_," Oxford Bulletin of Economics and Statistics 34 (February 1972): 3-32. Numerous other works have elaborated on the use of world prices as cost-benefit tools in the presence of a wide variety of domestic divergences and public sector policy constraints. Even in the second-best scenarios, world prices usually emerge as appropriate social prices. Two of these works are Partha Dasgupta and Joseph E. Stiglitz, "Benefit-Cost Analysis and Trade Policies," Journal of Political Economy 82 (January/February 1974): 1-33; and Peter G. Warr, "On the Shadow Pricing of Traded Commodities," Journal of Political Economy 85 (August 1977): 865-72.