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Equilibrium in autarky
A country involved in international trade for which changes in its domestic demand and domestic production are not large enough to change global prices is called a small open economy.
To understand the choices and consequences of using tariffs in a small open economy, take a quick look at the equilibrium outcome before any trade happens, in a world with only two goods. The diagram shows the country in general equilibrium, after all responses caused by a change in a policy variable have run their course. General equilibrium holds nothing economic constant, so that predictions about output and consumption incorporate a complete response to changes in incentives.
The way that benefits from engaging in commercial exchange are represented in two-goods space uses the production possibilities frontier and social indifference curves. Consumption benefits are measured by the satisfaction or utility obtained from consuming the goods. Production benefits are measured by the quantities of goods produced from the country’s factor endowment using available technology, and the outside line of the production possibilities frontier represents full employment of all factors of production (efficient production, or no factors wasted).
As long as there is just one country in the model, there is no opportunity for trade. The country is in autarky, providing everything it consumes from its own production.
In microeconomic theory, general equilibrium is distinguished from partial equilibrium, where only first-order responses to a variable or set of influences make up the analysis holding constant any economic responses outside of that narrower part of the economy (for example, the familiar demand and supply “scissors” diagram in price, quantity space might consider the effect of a price change holding income constant, although price changes affect incomes in the longer term).
The preference level set for the members of a society, as distinct from the more usual individual indifference curve drawn for just one person. See Samuelson (1956).
Meaning independence or self-sufficiency. A country is in a state of autarky if it is not trading with any other countries.
