Mathematical Social Sciences 3 (1982) 99-107 99

North-Holland Publishing Company

JUCHE IN INTERNATIONAL TRADE

Ki Hang KIM
MathematicalResearchGroup, Alabama State University, Montgomery, AL. 3619.5, U.S.A.

Communicated by Maria Nowakowska

Received 15 April 1981
Revised 5 April 1982

We show that in trade between two parties, one of whom has much greater endowment than the
other, calculated by the Nash bargaining solution, tends to exploit the poorer party, as compared
with the competitive equilibrium. This can be interpreted as saying that trade between a developed
country and a developing nation, each acting on the basis of self-interest, will result in exploita-
tion of the developing nation. This illustrates one aspect of the idea of Juche. We also show that if
trade in two goods among two parties is extended to a third, one of the two parties will be worse
off as a result under natural hypotheses. This can be interpreted as explaining why trade between
a developing country and a developed country might make some groups in the developing country
rich but other groups poor, a second aspect of Juche.

Keywords: Nash bargaining solution; competitive equilibrium; theory of trade; theory of

development.

Juche is a well-known Korean word meaning self-reliance, independence, self-

determination. In an economic setting it means that a developing nation should be
as self-sufficient as possible. In particular its economy should nclt be based on
exports of raw materials or labor-intensive manufactured products in the hope of
being able to import in return all the other types of goods it needs. There are two
possible problems with doing so:
(1) its economy becomes dependent on the developed nations who can then
exploit the country economically and even dominate it politically;
(2) trade with the developed nations tends to increase the inequality of those with-
in the country.
That is, owners of raw materials, land-owners who sell explort agriculture goods,
and industrialists tend to become very rich and the remainder of the population
stays very poor. Latin America suggests that these problems may really occur. This
theory is somewhat supported also by Zarembka (1972, pp. 104, 105, 115) in a
major work in the mathematical theory of development. Zarembka shows that an
isolated export sector does not help development, and that imports of food (and
similar items) should be restricted.
In the present paper we present a particular, very simplified model giving quanti-
tative expression to the first of the two problems. That is, we show that trade
between a developed (rich) and a developing (poor) one, using any of the standard

0165-4896/82/0000-0000/$02.75 0 1982 North-Holland

100 K. H. Kim / Ache in internutional trade

bargaining solutions, tends to exploit the poor one. Then we show that for two
groups trading within a country, trade with an outside nation will tend to be dis-
advantageous for one group.
This is contrary to the usual Western analysis of free trade. Western economists,
in particular David Ricardo, have argued under currently unrealistic assumptions,
that international trade always benefits each country. The unrealistic assumption is
that a country can change its economic structure overnight. If a country could do
this, and were not liable to outside economic or political force, it could always
refuse to trade and would thus trade only if it has an advantage.
But this is not the case. Accumulation of industrial facilities, skilled labor, and
infrastructure is the most difficult task facing a developing country and cannot be
changed overnight. If a country has invested billions of dollars and 10 years work
building an export electronics industry it cannot suddenly convert to a chemical
industry if the developed countries decide not to buy its electronics products.
Instead it must make concessions to sell some of its products at a reduced price.
In our analysis, we will compare what a developing countries should receive in
theory with what it will receive. The computation of what is should receive will be
based on the so-called competitive equilibrium. This is the trade that would result if
the rich country were imagined broken into small parts trading independently. That
is, wc assume perfect competition, not monopoly.
The competitive equilibrium is computed using three principles, each of which
will be expressed by equations.
C&I) The total amount bought equals the total amount sold.
CE(2) Each trader can spend at most the value he is paid for his goods.
CE(3) Each trader chooses his purchases to obtain that collection of goods which
he most prefers, for this given amount of money.
Let the two traders initially have amounts of two goods indicated by the ordered
pairs (a,, b,), (az, b2). Let the price ratio bep. Then we can express conditions CE( l),
LX(t) by the following equations where (xl, y,), (x2, y2) are the amounts they
purchase of the goods.
Tl(a) Quantity of goods 1 does not change a1+ a2=x1 +x2.
Tl(b) Quuntity of goods 2 does not change bl + b2 = y1+ y2-
T2(a) Trader 1 s budget equation pxl + yl SpaI + bl l

T2(b) Trader 2s budget equation px2 + y2 Ipa2 + b2.

Actually the last two inequalities must be equalities by the third condition, to
which we now turn.
We must have a measure of the value of any combination of goods to each trader.
This measure is called utility.

1, DefMtion. Wtility is a function from specified quantities of various goods to the

real numbers for a given individual, group, or nation, such that u(x)>u(y) if and
only if the group would rather have x than y.
 K. H. Kim / Juche in international trade 101

How does one compute this value? Gerard Debreu (1959) has proved existence of
utility subject to the conditions of transitivity, completeness, and continuity, for an
individuals preference.

2. Example. The binary relations a > b on the real numbers is (1) transitive, if 4 > 6
and li> c, (2) complete, either ar b or b? a, (3) continuous, if a,,5 b (2 b), then
lim ,,,,a,rb(rb).

Most workers assume that utility can be approximated by some function of fairly
simple form and then the parameters in this function are computed empirically. For
instance this is done in Henri Theils (1975) work on consumer demand. The two
most widely used types of functions are CES (constant elasticity of substitution) and
quadratic functions. The former generally have the form xax~ for quantities X,y of
two goods, and they will be used here. In particular we will examine the symmetric
case, at =/?. Here ar,cyare constants.
Now we can state the third condition.
T3(a) ul(xl, yl) is a maximum subject to ccinstraint T2(a).
T3(b) U& y2) is a maximum subject to constraint T2(b).

Here ul, u2 are the utility functions of the two traders. We can study these equations
by the method of Lagrange multipliers. Let A be a Lagrange multiplier. Then the
method of Lagrange multipliers states that at a maximum,
afOx, = af/ayj = 0
for f = uj(xjl yj) - Ik(pxj + yj)* This gives

auj/i$ = auj/aYj = A.
Thus

This is expressed by saying that the ratio of prices equals the ratio of marginal utili-
ties. Thus we have

T,,a) p = aulaxl a2d2/ax2

T3(b) p=
au,iay, au2/ay2'
This will enablL us to calculate what the country ought to receive. It can be proved
though we will not do it here, that the calculation we obtain would not be changed if
the rich country were broken into parts.
Next we mention how to calculate what will actually happen. The rich country
will act as a monopolist. That is, by means of its government, through trade laws, it
will bargain as a unit for what is most in its own interest. This means we have what is
called a bargaining problem.
 K. H. Kim / Juche in international trade

In bargaining suppose that there is a set R (geometrically it can be considered a

subset of the plane) giving all pairs (ZQ,z.+)of utilities, which the two parties can
obtain if they will jointly agree. If they disagree, no deal results and they stay at a
point (d,,&) called the disagreement point. The question is, what bargain will
actually be struck? There are three principal theories of bargaining, due respectively
to John Nash (1950), Kalai and Smorodinsky (1975), and Kalai (1977). Of these the
Nash solution seems most suitable to us for the present situation because
(1) it restricts attention to realistic possibilities, and
(2) it depends on aspects which are actually reflected in behavior.
It can be based on the following principle of Zeuthen (Harsanyi (1977)): in bargui-
ning whichever side can stcrndthe least risk of disagreement, makes the next conces-
sion. (Incidentally this principal itself may be in some way an argument in favor of
juche.)
In order to discuss bargaining theory, a refinement of utility theory is needed, in
ti hich the idea of probability theory is introduced. The previous utility functions are
unique up to a monotone increasing function on the real numbers. That is if v is
monotone increasing and u is a utility function that y/u is also a utility function
representing the same set of preferences. For situations X,y and a number QE [O,l]
let px + (1 - e)y denote the situation ini which x is obtained with probability e and y
is ob;+ed with probability (1 - e). Marschak (1950) proved that under the follow-
ing four assumptions there exisiis a utility function u satisfying u(ex+ (1 - &) =
w(x) + (1 - &u(y), unique up to a positive linear transformation au(x) + b where
a> 0 and b are constants.

Axiom Ml. The preference relation sf each individual is complete and transitive.

Axiom M2. If x is preferred to y and y is preferred to z, then for some e E (0, l), y is
indifferent (equally good) to QX+ (1 - e)z.

Axiom M3. There exists at least four alternatives no two of which are equally good.

Axiom M4. If x is indifferent to y, then for any z, e, ex + (1 - e)s is indifferent to

eY+O-e)z.
In our present case we must apply a monotone transformation to our previous
utility function xy in order that this condition be satisfied. Data from S.S. Stevens
(1959) suggests we should use (xy)@where p is perhaps 0.25.
Now we present Nashs bargairing theory. For n players, let R be the set of all
n-tuples (xi, x2, . . ..x.,) of real numbers such that by agreement we can obtain a situa-
tion where for all i players i has utility xi. Let d = (d I9d2, . . . , d,,) be the disagreement
point; that is, if any player does A accept the agreement every player j receives
utility d. We assume R is convex and compact and that all points of R are greater
than or equal to d, else they would not be considered. A bargaining solution is a
 K.H. Kim 1 Juche in inretnational trade 103

function f(R, d) which assigns to every (R,d) a point in R. We assume, in addition,

R contains a point which is better for every player than d.

Axiom N 1 (Symmetry). The solution is not changed if the players are interchanged,
and the utilities are also interchanged.

Axiom N2 (Pareto optimality). There is no pointy ER which is better for allplayers

than f(R, d).

Axiom N3 (Invariance under utility transformations). If we replace player is utilit_v

function ui by aui + b, a>O, then the solution is unchanged.

Axiom N4 (Independence of irrelevant alternatives). If RI c R and f(R, d) ER,,

then f(r,, d) = f(R, d).

The first condition says the identity of the players does not matter. The second
condition says that no point is better for everyone, else they would logically choose
it instead. The third condition says that the bargaining solution does not change
under positive linear transformations, since in theory this will not affect a players
behavior. The fourth condition says that if x will be the outcome in bargaining for a
region Rt it must also be the outcome for any subset of R containing x. This means
the Nash solution (unlike Kalai and Smorodinsky (1975)) has a local character. It is
related to the fact that bargainers do not consider unlikely outcomes and that as
bargaining continues the range of possibilities is gradually narrowed.

3. Theorem (Nash, 1950). The unique bargaining solution satisfying Axioms N 1-N4
is the solution which takes the pair (x1,x2,. . .,x,) E R such that (x1- d,)(x2 - d+
(x,, - d,,) is a maximum.

4. Example. For 2 players, let d = (0,O) and R be a triangle with vertices (0, 0),(0, b).
Then the product x1x2 is maximized at (a/2, b/2). This follows also directly from
Axioms Nl , N2, N3.

5. Example. Let d = (0,O) and R be a region which is symmetric under interchange

of the coordinates, such as a square or quarter-circle. Then by Axioms Nl, N2 the
solution is the maximum pair (y, y) contained in R.

6. Example. Let d = (0,O) and R be a region bounded by a continuous decreasing

curve C. Then by Lagrange multipliers, the solution point (x, y) will be such that
y/x = -dy/dx. In other words the vector (x, y), the tangent to the curve, and the
x-axis from an isosceles triangle.

Using Example 4 and Axiom N4 for 2 players we can then deal with general
triangles. This is the basic method of proof of Theorem 3.
104 K. H. Kim / Juche in internationul trade

7. Theorem. Let two traders (representing two countries) each have utility function
(xy)li4 for amounts (x, y) of two goods. Let their initial allocations before trade be
(b, c) and (I- b, I- c) respectively, where units are chosen so that the total amount
of each good is taken as 1 unit, and b, c is much less than I- b, I- c. Moreover,
assume b is coIosiderably less than c.
Then the co!mpetitive equilibrium, which may be considered the fair outcome of
trading, gives the first trader a utility of

But the Nash bargaining solution, which may be considered the actual outcome of
trading, is
@ + c) + 0((bc)4) + 0(c3) .

Here and below O(x) denotes a quantity less than or equal to k 1x 1 in absolute value,
for some constant k. In effect, it means a quantity too small to make any difference.

Proof. Let the results of trading be that the traders receive respective amounts
(x1,yr) and (x2,~2) of the goods. Let p be the ratio of the price of good 1 to the price
of good 2. Then we have the following equations:
x,+x2=1, (la)
Yl +y2= 19 (lb)

px,+y,=pb+c;
PX~+YZ=P(~ - b)+(l 4, (W
P =Y*h (W
P =Yz/Xz* (W

These follow immediately from the equations previously given.

From (3a), (3b) we have pxl = yl and px2 = ~2. Thus p(xl +x2) = y1+ ~2. By (la),
(1b), p(l) = 1.Therefore by (3a), (3b), yl =x1, y2 =x2. Now by (2a), 2~~= b + c, xl =
+(b+ c). And since yl --xl, yl=+(b+c). Thus ul =(+(b+~)~)~~=+(b+c)*? This
proves the first statement.
Now we approximate the Nash bargaining solution. The disagreement point
(( 1 - b)(l - c)) 114),since if there is no deal, each side retains its
(d,, d2) = ((EFc)~~,
current utility. The region

If xl # yl, then x2# y2 and both players vjll increase their utilities if they trade an
amount of goods so that they have equal amounts of both goods: +(x1+ ~r)~~x~yl
and 4(x2+ Y~)~zEx~~.Therefore the boundary of R is the curve {(x~)~~,(~2)~~):
X~+x2=l}={(ar~,u2):u;4- - 1, Uilo) in other words, a quarter circle.
 K. H. Kim / Juche in international trade 105

Now we have the problem of finding (x, y) on x2 +y2 = 1 maximizing

(x - dl)(y - dz). The quantity x will be the desired utility of player 1.
However, this problem leads to a 4th degree polynomial, so we will approximate.
The curve x2+y 2= 1 is very closely approximated (to order x4) by y = 1 - +x2 near
x = 0. (This can be seen by expanding (1 - x2)tj2 in an infinite series.) So we will
maximize (X- di)(y - &) on 1 - +x2. Here dr is very close to 0, d2 is close to 1.
In the method of Lagrange multipliers, we will set the partial derivatives of
(X- di)(y - d2) - A(y + +x2) equal to 0.
Q-d,-A=0
t y-d2-Ax=@
Therefore
(y-d2)/(x-d,)=x, y-d2=x2-d,x, 1 -+xZ-d2=X2-d,X,
so

x=+(d,&idf+6(1 -d2)).
The positive root must be taken. Since df = fi and 1 - d2 = 1 - (1 - b + c - bc) 14=
$(b + c- bc) + Ok assuming b is much less than c, d: will be much less than 1 - d2
and we can write

x= +fii-=& + O(dl) = ;$Q&= + O(d,) + o(P)

since llZZ6(7) = I/at + O(C3i2), SO
x=#b+c) "2+o((bc)"4)+o(c2).

Thus in terms of goods purchased the first trader receives only about + of his fair
value. (The quantity of goods purchased is proportional to the utility squared in the
optimum case x1 =yl.)

We can state the conclusion roughly as follows: a developing country trading with
a developed country under typically monopolistic conditions can expect to receive as
little as + of the fair value for its goods.

8. Remark. The RCGKS and Kalai solutions will coincide and will be that point on
the curve which provides equal utility increases to both players. That is x - d, =
y-d2 andx2+y2= 1. Thus
x2+(x+d2-dl)2= 1,
so

x=$(-2(d2-d,)*iw+8(l -(d2-dl)2)),
=$(-2(d2-dl)*1/4+4(l -(d2-d#)=+(d2-d,)+(l -(d2-d#.
106 K.H. Kim / Juchein internatitvnal
trade

so
x = +(b + c) + O((bc) 14)+ 0(c2).

This is even more striking. The utility to the poor country is infinitesimal compared
to a fair trade. This type of bargaining could provide an experimental test of the
different bargaining concepts.

9. Theorem. Suppose three traders each have utility function xay a,and that the
initial amounts of two goods they possess, before trading, are (b,,c,), (b2,c2),
(bk c3).
Then unless one of traders does not act, or we can renumber the traders and
goods so that

one of the first two parties would do better to trade only with the other.

Proof. In the case of three traders, where (xi, yi) are the goods trader i has after
trading, we have the following equations
x,+x2+x3=b,+b2+b3, (W
y1+y2+y3~l+~2+c3 (4w

PXI +YI =pb +CI, @a)

PX3 +Y3 =Pb3 + c2s (W

P Y14~ (aa)

P =Y2iX2# WO

P =Y3/X3. (SC)

SO yi=pXt, Cyt=pC From (4a) and Tl(b), p= CC/C bin From (Sa), 2pXi=
Xi.
pbi+CigSOXi=+biSCi/2p.Therefore

Xi=bi/2 + CiC b/2 C ci= (bi C ci+ ci C bi)/2 C ci,

yi=pXi= (biC cit Ci C bi)/2 C bi,

This is the utility to trader i. For two traders the same formula holds, but the
summation is only over those two traders.
 K. H. Kim / Juche in international trade 107

Write

Then trader is utility, for i= 1,2, is -&x+ Ci12.Xfor three traders and tbiy + ci/Zy
for two traders.
The curve &w + ci/2w where w runs through all real numbers, is monotone
decreasing for w < (Ci/bt) 12 and monotone increasing for w > (ci/bi) 12.Moreover,
its value is unchanged if we replace w by Ci/biW-This means we can compare the
value for trader i by comparing x or ci/bix to y or ci/biy.
If cz/b2 = ci&i, then no trade occurs in the two trade situsrion. If x = y, then no
trade occurs with the third trader. So assume neither of these equalities hold. By
symmetry in the goods, let x> y (else 1/x> l/y). By symmetry in the traders, let
c~/6~> cl/b*. By a standard inequality then c2/b2> y2> cl/b1 , so the value of
+bi w + cl/2 w will be greater for x. So trader 1 is always made richer. For trader 2 we
have two cases:
Case 1. x2s ~24. Then, since x2> y2, trader 2 is hurt.
Case 2. x22 c2/b2. Then trader 2 will be not be hurt only if x2 cz/bty ; that is,
xyr c24. This gives the case stated in the theorem.

10. Corollary. One of traders 1,2 will be hurt by trading with trader 3 unless in the
total situation cl/bl, c2/b2 lie on the same side of (q + c2+ c$/(b, + b2 + b3); that is,
unless both are sellers of the same good in the total situation.

Proof. This follows from the assumptions of Case 2 of the proof of Theorem 9,
where x2 2 c2/& and x2 r cl /bl.

In international trade the last assumption is unreasonable, so that we could

conclude that one of the two groups within the country will be made richer and the
other poorer.

G. Debreu, The Theory of Values (Wiley, New York, 1959).

E. Kalai, Proportional solutions to bargaining situations: interpersonal utility comparisons, Econo-
metrica 45 (1977) 1623-1630.
E. Kalai and M. Smorodinsky, Other solutions to Nashs bargaining problem, Econometrica 43 (1975)
513-518.
J. Marschak, Rational behavior, uncertain prospects, and measurable utility, Econometrica 18 (1950)
111-141.
J. Nash, The bargaining problem, Econometrica 18 (1950) 155-162.
S.S. Stevens, Measurement, psychophysics, and utility, in: C.W. Churchman and P. Ratoosh, eds.,
Measurement: Definitions and Theories (Wiley, New York, 1959) 18-63.
H. Theil, Theory and Measurement of Consumer Demand, Vol. 1 (North-Holland, Amsterdam, 1975).
P. Zarembka, Toward a Mathematical Theory of Economic Development (Holden-Day, San Francisco,
1972)