Measuring the Gains from Trade—A Case Study of Pakistan’s Trade with India

The recent literature on the theory of tariffs and trade restrictions has emphasized the optimality of free trade policies for both developed and developing countries. There are exceptional cases in which trade restrictions can be justified—when, for example, a country has monopoly power in trade or when certain “second-best” conditions are met.1 In general, however, it is believed that a country which imposes restrictions on its trade suffers a decline in real income. A number of studies for both developed and developing countries have estimated the economic benefits that would accrue to these countries from the elimination of all trade restrictions.* The purpose of this paper is to provide a method for measuring the economic benefits that a country would receive as the result of the elimination of a country-specific restriction while maintaining all restrictions applying to commodities. Methods of measuring the static gains to a country removing commodity restrictions are already well known and need no further elaboration. The elimination of a country-specific restriction on trade, however, presents a slightly different problem of measurement since the liberalization may affect only one portion of the country’s trade and give rise to foreign exchange savings as well as the familiar gains from reduced producers’ inefficiency and increased consumers’ surplus.