THE CLASSICAL MODEL OF INTERNATIONAL TRADE
Topic 3.3
The Gains from International Trade
Consider Figure 3.4
The way we calculate the gains from trade is to compare the equilibrium CIC in autarky with the trade equilibrium CIC.
So moving from K to I is a gain from trade. Since I is above to the right of K it represents a welfare gain.
(But if consumption preferences were extreme (e.g. A residents only consumed S) then there would be no gain from trade.)
Another test of gains is: is the vertical intercept higher (GDP1/ PTO).
The further the TOT is from the PPF of country A, the greater are the gains to that country.
This model does not explicitly solve for the exact equilibrium TOT.
A small country could actually have greater relative trade gains than a larger country if the TOT was equidistant between the two PPFs because equal trade gains are being divided by a smaller base.
