Introduction

Chapter 3 analyzed the welfare effects and terms-of-trade effects of an international transfer in a two-good, two-country and Walrasian-stable general equilibrium framework of perfect competition. The model is attractive because its elegant simplicity allows us to derive strong analytic results regarding the terms-of-trade effect and Samuelson's theorem. At the same time, one might argue that the model's simplicity is also its limitation because it does not enable us to analyze some issues of interest in the real world. In his debate with Ohlin, reviewed in chapter 2, Keynes emphasized the importance of a shift of resources from one sector to another as a result of an international transfer. One may wonder, therefore, whether or not such a shift in resources between different sectors can be strong enough in principle to upset Samuelson's theorem under specific circumstances. A few examples may clarify the issue.

First, consider the presence of public goods, that is goods produced and provided by the government after taxing the private sector. Suppose the government of the country receiving the transfer greatly increases the production of public goods as a result of the transfer. Since such an increase draws resources away from the private sector into the public sector, resulting in a decrease in private sector production, can we be sure that the transfer will be beneficial to the recipient as Samuelson's theorem would lead us to believe?

Second, chapter 3 analyzed shifts between traded goods only, but both Keynes and Ohlin stressed the importance of non-traded goods sectors.