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THE OPEN‐ECONOMY PHILLIPS CURVES AND THE WELFARE GAINS FROM TRADE *
Author(s) -
Ip Pui Chi
Publication year - 1978
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.1978.tb00585.x
Subject(s) - economics , autarky , exchange rate , phillips curve , balance of payments , welfare , small open economy , unemployment , inflation (cosmology) , open economy , exchange rate regime , full employment , terms of trade , gains from trade , monetary economics , free trade , international economics , macroeconomics , physics , theoretical physics , market economy
By postulating convex‐to‐origin Phillips curves and a concave‐to‐origin indifference map in the unemployment‐inflation space, we find that, the pure gains from trade aside, the post‐trade equilibrium under flexible exchange rates cannot be superior to that under autarky because a variable exchange rate generates no countercyclical forces. Under a fixed exchange rate regime, a country can be better off (worse off) after trade than before trade if the foreign rate of inflation is lower (higher) than that prevailing in autarkic equilibrium. If countries co‐operate and jointly reduce their rates of inflation, they can improve their welfare and yet maintain balance of payments equilibrium. If the rate of profit is a variable determining the position of the Phillips relationship, international trade improves the welfare of the labour‐abundant and worsens that of the capital‐abundant country.