Short-run and long-run welfare implications of free trade

Abstract

We consider a two-factor (capital and labour), two-good (consumption and invest- ment goods), one-country, overlapping-generations model. For the case in which the closed economy follows an efficient path we prove that if trade lowers (raises) the relative price of the capital-intensive good, the current old people, who only own capital, lose (gain) from the opening of the economy, while all subsequent generations, whose only endowment is labour, benefit (lose) from it. It is also shown that the country gains from trade, in the sense that the generations made better off by trade can compensate those that lose from the opening of the economy