A GENERAL EQUILIBRIUM APPROACH TO THE THEORY OF INTERNATIONAL TRADE: DERIVATION OF EXCESS SUPPLY AND FACTOR PRICE FUNCTIONS

The traditional procedure of the estimation of import and export functions has separated the foreign sector from the domestic economy by not including explicitly optimizing behaviors of the firms and households. A functional form has been arbitrarily chosen to facilitate estimation of the parameters of major interest, income and prices. In this study we try to incorporate the optimizing process of the firms and households. The optimization process determines the output supplied and demanded by each sector of the economy. The difference between the two amounts becomes the net excess supply of the economy, which could be positive or negative depending upon whether the item in question is an export or import.;The model is used to estimate the structure of the Korean economy. The estimation results enable us to verify some theorems of the international trade such as Stolper-Samuelson theorem and Rybczynski theorem. We also find out some policy trade-offs between trade balance and income distribution.;The households' behavior is analyzed using the indirect utility function, the dual of the direct utility function which represents the society's preferences. The firms' behavior is explained in terms of the variable profit function which represents the economy's technology and factor endowment. We first derive, from the optimization process, demand and supply functions of the economy and then combine both decisions to derive import and export functions of the economy.