The name is absent

-Δb c - Ъ - Δb^, Δb,, . Ъ + Δb

---Δb н--Vp*--Δb

j(p*Γ² [Vp* - 1 - с]

Given that p* > p^A* the expression above is more than

which is positive given that v > 2. ■

Moving down the chain: Proposition 3 identifies one instance, that
is case 3b, where a reversal in the patterns of trade is optimal and feasible
without any outside intervention. The government can increase welfare by
encouraging producers to specialize in the production of the primary com-
modity. This is because the world price of the high tech good is relatively
low and thus welfare is higher when the economy specializes in the pro-
duction of the primary commodity. In contrast, when the economy exports
the high-tech product the gains from trade are low because of the relatively
small differential between the autarky price and the world price.

5.1 Numerical Example

Let W^A, W^x , and W^γ denote aggregate welfare under autarky, aggregate
welfare under trade when the economy maximizes the production of the
high-skill product X, and aggregate welfare under trade when the economy
maximizes the production of the low-skill primary commodity Y. In ad-
dition, 0l denote the proportion of type i(= l,m,h) agents given that the
economy maximizes production in sector j (= X, Y). We set the following
parameter values: с = 2, v = 2.2, V = 5. These values imply that bɪ = .455,
b2 = 1.393, p^A* = .68 and that p^A ∈ (.44,1). Notice that if the budget is
not binding then the autarky price will be equal to .4. The various cases in
table 2 below correspond to the cases analyzed in proposition 3. An asterisk
denotes optimal choice.

[Please insert Table 2 about here]

6 Conclusion

In the beginning of this paper we asked the following question. Is it ever
optimal for a government of a small developing economy that moves from

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