Finite Change – Implication for Trade Theory,
Policy and Development
Sugata Marjit
Centre for Studies in Social Sciences Calcutta, India
Biswajit Mandal
Visva-Bharati University, Santiniketan, India
Prepared for Silver Jubilee Celebration Lecture at the IGIDR
7/29/2017
IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 What is Finite Change in Trade Theory?
 Why it is interesting and of non-trivial consequence?
 Fundamental and Derived outcomes.
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Fundamental

A Reinterpretation of the Factor Price Equalization
result of Samuelson.
 Pattern of Specialization and Factor Price Equalization .
 Why broader interpretation of HOS theorem may
invalidate FPE result under ideal conditions.

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Such assertion has close link with the idea of finite
change.
IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Jones (1974):
 A small country with potential to produce many goods with
two factors – capital (K) and labor (L).
 As the endowment ratio of a country moves from a high to
a low value, pattern of specialization changes.
 May be through a process of growth, technical progress and
accumulation of capital.
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
K
1
2
3
O
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L
IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
1
2 and 1
3 and 2
2
3
O
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Consider n goods > m factor case in each country under
autarky.
 Identical technology etc except Endowments (HOS). No
factor intensity reversal of any kind.
 Post Trade:

each country specializes in “m” goods.

But different sets of “m” goods.

FPE will not hold.
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Trade forces finite change.
 Similarly trade in factors can enforce finite change.
 Some literature:
 Ethier (1985), Jones and Marjit (1992), Choi and Marjit (1998),
Findaly and Jones (2000), Marjit and Kar (2005, 2011, 2012),
Mandal and Marjit (2012) etc.
 Dixit-Stiglitz-Krugman models usually “add” sectors through trade.
 More recent – Melitz-Antras-Eaton-Kortum-Helpman etc. argue of
productivity shift through exit of bad firms – not closure of activities
as such.
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
Jones and Marjit (1992)
 A closed economy environment where there are n industries and within each
industry there are varieties
of goods.
 Within an industry, there are variety of goods produced using labor and a
common type of capital
. Thus labor is mobile across industries and within an
industry across varieties. Capital is specific to an industry but mobile across
varieties within the industry. In a closed economy, positive demands for all goods
guarantee positive output for all varieties.
 Once we allow for trade: For each industry only one variety will survive or for one
of the industries two varieties will survive and the rest will produce only one
variety.
 Large shocks to the system will lead to vanishing varieties. Thus we shall have
either a pure specific factor model or a system where (n-1) sectors will have a
specific factor structure and the residual a 2X2 HOS framework.
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Some interesting implications
 Findlay-Jones (2000):
 What does labor-saving technological progress do to wages?
 Trade and labor economists differ, why?
 They can agree if trade leads to finite change.
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Choi - Marjit (1998):
Tariff-Quota non-equivalence in competitive models
We may let 3 to shut down. But if we wish to protect 3 through a tariff or
quota, the outcome may be drastically different – WHY?
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
P
P*+t = Pd
P*
O
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B
A
Q
IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Factor Movement :Marjit and Kar (2005, 2011, 2012)
Factor flows and wage-distribution
 Which sectors survive as factors become internationally mobile.
 Emigration and capital mobility
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Capital Mobility and Two-sided wage gap (South Vs North)
 In South
, in North
. They may specialize in two different
subsets
 (X, Y) in South
 (Y, Z) in North

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rises in both countries.
IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Argument is intricate in the sense that countries are
otherwise similar
 Critical point is that the mixed sector has to be laborintensive, so that
can actually raise
in the North
through viability of Z. In the south exactly opposite happens.
 Finite change or large shocks (Jones, 2008) are induced by
price changes that lead to closure of sectors/industries.
 They may have completely different implications in general
equilibrium from situation where we continue to be within the
cone of diversification.
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Capital mobility and Corruption: Mandal and Marjit (2012)
 Which sector(s) survive (s) as capital becomes internationally mobile.
 If Z is “labor” intensive implying a low cost share of capital, the cost will
exceed
and Z will vanish. This is trivially true if
 This is ensured if the following condition is satisfied
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IGIDR, 2012
Finite Change – Implication for Trade Theory, Policy and Development
contd…
 Critical problems of growth is continuous adjustments needed
to accommodate contracting and vanishing sectors.
Comparison of two growth paths done only in terms of the
rates is incomplete.
 The idea of inclusive or exclusive growth is also related to the
idea of finite change.
 Jones (2004) we can not move resources so quickly from
contracting to expanding sectors, people lose occupations.
 Marjit and Kar (2011, OUP) on West Bengal and Maharashtra
example. The Informal Sector in Gen.eqm. Does the trick.
 Therefore in theory also, the issue of finite change should be
far more important than local changes.
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IGIDR, 2012
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