Firless firwoes: How preferences can interfere with the theorems of international trade

Abstract

An example is presented of a two-country, two-factor, four-good trade model in which free trade causes factor prices to be drawn farther apart than they were in autarky. The example is equivalent to a two-good model with a double factor intensity reversal (FIR), and thus demonstrates that the problems associated with FIRs can arise in many dimensions without them. These problems include the undermining of other trade theorems as well, and can be avoided only by making some assumption about demand as well as about technology. For example, the model becomes well-behaved if preferences and technology are both Cobb-Douglas.