Search

This paper applies the infra-marginal analysis, which is a combination of marginal and total cost-benefit analysis, to a model with both constant returns and increasing returns in production and with exogenous and endogenous comparative advantages. It demonstrates that as transaction conditions are improved, the general equilibrium discontinuously jumps from autarky to partial division of labor with a dual structure, then to the complete division of labor where dual structure disappears. Two types of dual structure may occur in the transitional stage of economic development and globalization. One of them involves the division of labor in the developed economy and autarky in the less developed economy, generating increasing disparity of per capita real income between the two types of economies. The other involves a domestic dual structure in the less developed economy, where the population is divided between commercialized sector which trades with foreign country and self-sufficient sector which is not involved in trade. All gains from trade go to the developed economy. This paper shows that deterioration of a country’s terms of trade may concur with an increase of gains that this country receives from trade provided productivity progress from an expanded network of division of labor outpaces the deterioration of terms of trade. In the model with both endogenous and exogenous comparative advantages, a country may exports a good with exogenous comparative disadvantage if endogenous comparative advantage dominates this exogenous comparative disadvantage.

The paper introduces differences in production and transaction conditions between countries into the model of monopolistic competition to investigate the interplay between trade policies and development strategies. It applies inframarginal analysis, which is total benefit analysis between corner solutions in addition to marginal analysis of each corner solution, to show that as transaction conditions are improved, the general equilibrium may discontinuously jump across different patterns of trade and economic development. It compares the marginal and inframarginal comparative statics of equilibrium in the model of monopolistic competition with the core theorems in the neoclassical trade models and with conventional wisdom in development economics. It shows that as analytical framework is altered, the meanings of concepts and related empirical observations will be changed too.