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A NEW THEORY OF DEMAND AND SUPPLY AND EMERGENCE OF INTERNATIONAL TRADE FROM DOMESTIC TRADE
Author(s) -
Yang Xiaokai
Publication year - 1996
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/j.1468-0106.1996.tb00186.x
Subject(s) - economics , division of labour , comparative advantage , transaction cost , microeconomics , supply and demand , productivity , interdependence , demand curve , variety (cybernetics) , consumption (sociology) , production (economics) , industrial organization , international trade , macroeconomics , market economy , social science , artificial intelligence , sociology , political science , computer science , law
. In the paper a fixed learning cost is introduced into a framework with consumer‐producers and transaction costs. The fixed learning cost yields a rate of return on the investment in individual specific learning and training which is increasing in its rate of utilization. Division of labor can avoid duplicated learning costs and generate economies of specialized learning. The tradeoff between economies of specialization and transaction costs can be used to explain concurrent increases in the extent of the market, aggregate demand, productivity, trade dependence, the degree of market integration, the degree of production concentration, diversity of economic structure, variety of different professions, each person's level of specialization, and the extent of endogenous comparative advantage and the emergence of international trade from domestic trade. This model explains demand and supply as two sides of the level of division of labor which is determined by a transaction cost coefficient. Hence, the demand law may not hold even for normal goods owing to complicated interdependencies between the level of specialization and demand and between the level of specialization and prices of traded goods. The extended version of this model with the CES function is used to endogenize variety of consumption in addition to the endogenization of individuals’level of specialization.