Optimal policv in the presence of international trade and investment, which has been previouslIN analyzed by Murray Kemp and Ronald Jones (1967) in the context of a twofactor, two-good general equiilibrium model, constitutes the subject of analysis in a recent article in this Review byT Franz Gehrels. Gehrels' framework, which postulates a three-factor, two-good economy, differs from that of Kemp and Jones in format but not in substance. Nevertheless, Gehrels has made an important contribution by providing a more complete discussion of partial optimization and by deriving optimal tariffs and taxes in the presence of the interindustrv wage differential that characterizes factor markets in the underdeveloped countries. The objective of this note is to show that Gehrels' optimal policy in the presence of the wage differential is incomplete and that his modification of the optimum tariff formula is not always valid. The assumptions and notations used in this note are the same as those introduced bv Gehrels. The problem is to maximize the social utilitv function

tinational corporation in the arena of economic activity and political influence, trade theorists have either ignored it or expressed unguarded skepticism at the ability of the conventional trade models to successfully capture and analyze the features of this new phenomenon.' The purpose of this paper is twofold: first, by building upon the contribution by Richard Caves, we will show that the traditional trade models can be adapted in a way that preserves most, if not all, of the attributes introduced by international firms.2 Second, we will conduct a comparative statics analysis to explore the implications of tariffs and taxes for resource allocation and international capital movements. Our results here confirm what has already been well established in myriad empirical studies, that maturation of the international firm has vastly increased economic interdependence among trading countries, and that few nations can eschew the ripples caused by economic policies of other nations.3