Chapter 1 National Security and International Trade: A Simple General Equilibrium Model

This chapter presents a general equilibrium model that embeds the issue of national security within a two-country Heckscher–Ohlin model of international trade. “National security” is defined as a public good that is an increasing function of a country's own defense expenditure and a decreasing function of the other country's defense expenditure. Defense is a non-traded public good produced by capital and labor, along with two tradable private goods in each country. The model is solved as a Nash equilibrium in defense expenditures and a Walrasian equilibrium for the two traded goods and the factors of production. It is shown that opening to international trade raises defense expenditures in each country since national security is a normal good in each of them. If defense is more capital-intensive than both tradable goods then trade lowers the cost of defense for the labor-abundant country and raises it for the capital-abundant country.