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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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Dixit and Norman (1980) provided a remarkable result of integrated world equilibrium that the world prices remain the same when the allocation of factor endowments of two countries changes within the parallelogram formed by the rays of diversification cone. What structure are for the prices? This paper derived the equalized factor prices and general trade equilibrium embedded in the IWE diagram. The study demonstrated that the equalized factor prices are the function of world factor endowments. Moreover, the world prices make sure that countries participating in free trade gain from trade. This result is helpful for the studies of factor price non-equalizations when countries have different productivities.

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