Models of the firm and international trade under uncertainty

Abstract

One of the significant advances in economic theory has been the incorporation of uncertainty into the models used to investigate economic behavior. The explicit treatment of uncertainty has permitted economists to predict the behavior of economic agents operating in an uncertain environment and to explain, for example, the existence of insurance, stock markets, and forward exchange markets that have no necessary role in a deterministic world. One natural application of the economics of uncertainty has been to the study of international trade and exchange in which uncertainty regarding exchange rates and relative prices is a prominent feature of the environment of economic agents. The purpose of this paper is to frame the international trade results developed in the recent works of Wolfgang Mayer and Raveendra Batra in light of the current state of the theory of the firm under uncertainty. Before analyzing the effect of uncertainty on international trade, a perspective on the application of the economics of uncertainty to neoclassical theory will be presented with an emphasis on the theory of the firm.

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