NONSUBSTITUTION THEOREMS FOR A SMALL TRADING COUNTRY

This paper proves a nonsubstitution theorem for small trading economies, under quite plausible conditions. Conditions are established under which the consumption possibility set for an economy that has nontradeable factors of production and nontradeable consumption goods is bounded by a hyperplane, rather than by a curved surface. The theorem allows the possibility that the prices of nontradeable factors, and hence the incomes of their owners, may depend on domestic supplies of nontradeable factors. It is concluded that the equilibrium wage and the equilibrium prices of all consumption goods are independent of domestic endowments or the shape of demand functions. The theorem tends to strengthen the view that, in the absence of trade barriers, differences in real wages across countries cannot be explained by differences in resource endowments.