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We extend the Jones (1971) analysis of the effects of distortions in 2×2 trade models to the case of a two-sector dynamic general equilibrium model of a small open economy with capital accumulation. We do a comparative steady state analysis for the effect of policy changes on factor prices and the capital stock, and examine the dynamics of the system in the neighborhood of the steady state. We also show that the system will have multiple equilibria when value and physical factor intensity rankings of the sectors do not agree.

The collection of essays in this volume provides fairly comprehensive analyses of contemporary theoretical and policy issues in international trade. As technological revolution eliminates communications costs and the countries gear towards more open trade regimes through negotiations at the WTO, the world effectively gets smaller. The evolution of research in trade theory and policy has closely followed the trends in global economy. Issues such as how trade affects distribution of income across and within nations, generates resources for growth, leads to bilateral and multilateral cooperation and conflicts, and many others have been picked up and analyzed systematically in various chapters of this volume. Before we go into the details of the relevant sections and constituent chapters, it is worthwhile to emphasize two special features of this volume.

The aspect of economic contrast seen in developing countries shoots primarily from the structure of loan allocation to the micro, small and medium enterprises (MSME) sector, which is essential for job creation and understanding the role of microfinance institutions (MFIs) in meeting the credit demands of the vulnerable but vital sector of less developed economies. The study demonstrates the impact of MSME protection in terms of both fixed and adjustable factor coefficient settings, creating a model of a small open economy with three sectors: a skill-intensive export sector; a capital-intensive import competing sector; and a labour-intensive import competing and intermediate products producing sector. It analyzes the types of protection that aid in the expansion of credit and the alleviation of capital constraints, which further highlights the insufficiencies of tariff protection for the organized sector and simple credit guarantee policies to provide adequate credit flow and thus continued MSME growth. Finally, it considers the importance of priority sector lending policies in ensuring adequate credit distribution to this sector. The results show that protection helps in enhancing flow of credit and thereby works to relax the capital constraint. However, the tariff protection for organized sector may positively or negatively affect the non-traded unorganized sector.

The existing theoretical literature does not adequately take into consideration the existence of non-traded goods and the nature of capital mobility between the traded and the non-traded sectors in analyzing the consequences of liberalized investment policies on the relative wage inequality in the developing countries. The present chapter purports to fill in this gap by using two four-sector general equilibrium models reasonable for a developing economy. We have examined the outcome of foreign capital inflows on wage inequality when non-traded goods are intermediate inputs and final goods. Appropriate policy recommendations for improving the wage inequality have also been made.

This paper examines the impact of residents’ human capital investment inequality on the urban–rural income gap, using China’s provincial panel data from 1997 to 2013. The results show that, at the national level as well as at the regional level, residents’ overall human capital investment inequality has a positive significant impact on the urban–rural income gap. In addition, the impact of overall human capital investment inequality increased monotonically from the eastern region inward to the western region. In terms of the relative impact of each component of human capital investment inequality on the urban–rural income gap, migration investment inequality appears to have the greatest impact at the national level, whereas health investment inequality has the greatest impact on the urban–rural income gap in the eastern region, and education investment inequality exhibits the greatest impact in the central and western regions. We also investigate the impact of human capital investment inequality on the urban–rural income gap over different periods. The results show that residents’ overall human capital investment inequality had a positive impact on the urban–rural income gap in the period 1997–2008, but the impact rapidly shrunk in 2009–2013. Furthermore, the impact of residents’ health investment inequality on the urban–rural income gap shows a downward trend, and the impact of residents’ education investment inequality trended slightly upward from 1997 to 2008, and then rapidly shrunk in 2009–2013. Finally, the impact of residents’ migration investment inequality was only significant in 1997–2002.

Purpose – This chapter aims to examine trade patterns and gains from trade in a two-country general equilibrium model of increasing returns and oligopoly.

Approach – A general equilibrium model of increasing returns and oligopoly.

Findings – The determination of patterns of specialization and trade and gains from trade highly depends on the interaction between the degree of increasing returns and market power as well as the cross-country difference in factor endowments.

Originality – Unlike the existing literature, we endogenize the determination of specialization by using an allocation curve approach by Ethier (1982). To our knowledge, there is no comparable study that incorporates Ethier's (1982) approach to oligopolistic models of international trade.

Purpose − The principal aim of this chapter is to present a comprehensive and critical review of Murray Kemp's contributions to the discipline of international trade and welfare economics.

Methodology/Approach − This chapter employs the critical literature review approach, including archival analysis and face-to-face interviews.

Findings − It is shown that Kemp has been a key player in the modernization of trade theory. In particular, he has extended the theorems of gains from trade in many different directions and under the most general conditions.

Practical implications − In surveying Kemp's research contributions this chapter provides a useful overview of the development of the normative theory of trade. It also examines a number of methodological issues that may prove to be useful to economic theorists.

Purpose – This chapter shows that in the presence of tourism, the traditional policy prescription, free trade in goods and the standard Pigouvian tax on pollution, is not optimal for a small open economy.

Methodology/approach – The general-equilibrium analysis is employed to study environmental regulations for a small open economy with tourism.

Findings – Foreign tourists consume mainly local non-traded goods in the tourist-receiving economy. Inbound tourism converts formally non-traded goods into tradables, generating a tourism terms-of-trade effect. Owing to this favourable effect, positive tariffs and stricter pollution taxes can actually improve welfare of domestic residents. The optimal rates of tariffs and pollution taxes are derived and explained for the economy with tourism. These positive rates are confirmed by simulations.

Originality/value of chapter – The presence of tourism can alter the welfare implications of the traditional trade policy.