Preference Distortion, Information Cost and Comparative Advantage: A Theoretical Quest to Claim Trade Posture in Post-Pandemic Era
| Author | Soumyananda Dinda,Tonmoy Chatterjee |
| DOI | 10.1177/00157325211060934 |
| Published date | 01 May 2022 |
| Date | 01 May 2022 |
| Subject Matter | Original Articles |
Preference Distortion,
Information Cost
and Comparative
Advantage: A Theoretical
Quest to Claim
Trade Posture in Post-
Pandemic Era
Tonmoy Chatterjee1 and Soumyananda Dinda2
Abstract
This study argues that post-pandemic world may not necessarily follow the usual
mechanism of trade. In fact, recent pandemic dragged down us to the trajec-
tory of new normalcy. Economic behaviour under new normalcy has changed
immensely following several distorted effects, namely preference distortion and
information asymmetry. Such distortions change trade posture via gains from
trade arguments under comparative advantage. Using the traditional Ricardian
model with two countries, two goods and one factor, this study explores the
effect of changes in consumer preferences on trade patterns based on com-
parative advantage and the significance of eliminating information uncertainty. To
retain the pre-pandemic gains from such trade this study advocates for consid-
eration of information cost associated with trade basket along with innovation.
These results could be important for policymaking at least in post pandemic
regime. Sensitivity analysis has also been constructed to capture the extent of
changes in trade–autarky profit gaps. This study builds on the verge of economic
crisis linking to pandemic and international trade.
JEL Codes: C70, D81, F11, L15
Original Article
1 Department of Economics, Ananda Chandra College, Jalpaiguri, West Bengal, India.
2 Department of Economics, University of Burdwan, Burdwan, West Bengal, India.
Corresponding author:
Tonmoy Chatterjee, Department of Economics, Ananda Chandra College, Jalpaiguri 735101, West
Bengal, India.
E-mail: tonmoychatterjee.economics@gmail.com
Foreign Trade Review
57(2) 127–147, 2022
© 2022 Indian Institute of
Foreign Trade
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DOI: 10.1177/00157325211060934
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128 Foreign Trade Review 57(2)
Keywords
Pandemic, international trade, preferences, income distribution, information and
two-stage game
Introduction
On 11 March 2020, the WHO declared the ongoing health crisis owing to nCoV-19
as a pandemic. Overnight the entire world entered into a chaotic situation with lots
of unknowns. To stop the further spread of infection, almost all the major countries
adopted measures like nationwide lockdown and also implemented several Standard
Operating Procedures (SOPs). for instance social distancing, wearing face masks
when go out etc. Both lockdown and several SOPs have changed our normal way of
living, and consequently it distract us from the developmental path in which we are
used to. In fact, prolonged nationwide lockdown makes economic system a para-
lysed one with almost zero trade and on the other side SOPs change the usual behav-
iour of both consumers and producers via sentiment distortion (Ahmed et al., 2020;
Kumar, 2020; Michie, 2020; Sinha et al., 2020). In short, following pandemic our
economies’ movements are deepening towards economic crisis.
Economists often believe that economic crises are usually developed due to the
mishandling of the following: foreign reserve, foreign debt, deficit in current and
capital accounts, fiscal deficit, etc. (Krugman, 1979; Ma & Cheng, 2003). In fact,
Krugman (1979) blames lack of foreign reserves as the responsible factor behind
the generation of currency crisis and following this economic crisis may arise.
Again, capital account deficit and credit market imperfection can also trigger
the degree of economic crisis (Mendoza, 2001; Reinhart & Reinhart, 2015).
Furthermore, like the virus, our economic system is also contagious as it is linked
with other economies via international trade. Precisely, an economic crisis of one
nation can affect others by generating crisis in their land (Forbes, 2001; Glick &
Rose, 1999). So far, the economic crises are described above arise mainly follow-
ing pure trade-based arguments. However, in the present context the crisis arises
mainly due to non-economic and non-trade issues like health crisis and impor-
tantly it affects trade also (Forbes, 2000). Interestingly, here international trade is
affected by some non-economic phenomena and at the same time it is embedded
with economic crisis. Therefore, a rigorous and critical analysis on trade in post-
pandemic period is needed.
Trade theories often describe the linkages between nations in economic terms.
More specifically, nations can engage themselves in trade with other nation fol-
lowing patterns of trade via exploring the role of factors which are indeed in driv-
ing seat. From history of trade theory we find three major postulates behind the
driving forces of trade, namely comparative advantage theory derived by Ricardo,
factor endowment theory proposed by Hecksche–Ohlin–Samuelson and models
based on increasing returns to scale introduced by Krugman. Usually these theo-
ries claim that trade patterns are derived on the basis of four elements: tastes,
technology, endowment and time (Marjit, 2007). In this study, we propose two
important hypotheses considering the present crisis owing to ongoing pandemic.
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