ABSTRACT

This chapter discusses the fundamental concept of social indifference. It also discusses the problems of how to portray general equilibrium in a closed economy, and in a simple open economy which is a price taker in the international market. The chapter provides a neoclassical demonstration of comparative advantage. The simplifying assumption made by the neoclassical theory of international trade is the existence of a logically acceptable social indifference map. When an optimizing income-redistribution policy is pursued, the social indifference map can be used to describe both the consumption behavior of the economy and changes in social welfare. But in the absence of an optimizing income-redistribution policy, the social indifference map need not indicate changes in social welfare. Use the social indifference map for predicting the demand behavior of the economy alone. Otherwise, the impression might be created that the social indifference map is all that is needed in a discussion of the effects of trade on welfare.