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General Trade Equilibrium of Integrated World Economy

Guo, Baoping (2015): General Trade Equilibrium of Integrated World Economy.

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The price-trade equilibrium as a central task of international economics is not fulfilled yet, even for the simplest 2x2x2 Heckscher-Ohlin model, due to its complexities. This paper explored the equilibrium by a simple geometrical derivation within the IWE. The study demonstrated that the endogenous factor price equalized is the function of world factor endowments and it has four important features: (i) it makes sure that countries participating in free trade gain from trade. (ii) it is the Dixit-Norman price that remains the same when the allocation of factor endowments changes within the IWE box. The FPE is unique for a giving IWE problem. (iii) the price-trade equilibrium displays the Heckscher-Ohlin theorem directly. (iv) the relative factor price (wage/rental ratio) is not related to technologies. The study also demonstrated the equilibrium relationship for the model with the context of two factors, two commodities, and multiple countries. The new economic logic from this the equilibrium is that world factor endowments determine world price (common commodity price and factor price).

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