Endowment Shock and its Welfare Effects in Open Market Economies

This paper presents a simple static model of a world economy with two countries, two goods, and two representative agents. Initial endowments are the source of each good. Given that the endowments of the two goods across the two countries are asymmetric, the countries have an incentive to trade. Under certain conditions, it is possible that a onetime increase in a good of one country may be called an endowment shock that reduces the welfare of its trading partner. This endowment shock is the equivalent of manna from heaven.