International Trade in Middle Products and the Transfer Problem

For several decades, the Theory of International Trade has elaborated its models and propositions using mostly (what we can refer to as) a classical assumption regarding the type of commodities which represent the world trade pattern: international trade takes place in final consumption goods. Of course, "extensions" to such a paradigm have been pursued in the international trade literature. These extensions have incorporated other categories of traded goods as well, such as capital goods and intermediate goods. Nontraded goods have also been incorporated as part of the individuals' consumption opportunities. Also, models have been developed in which labor is regarded as an internationally mobile factor. However, for the most part, all of these theoretical extensions have a "common denominator"; namely, they have mostly preserved such a classical assumption in the following essential sense: the commodities exchanged in the world market are formally incorporated in the countries' final demand functions; in open economies, the individuals' utility functions incorporate commodities traded in the world market.