Qualifying assessment
P112 Qualifications and Assumptions
The conclusion that free trade is universally beneficial is a rather bold one to draw from such a simple model (figure 6.2). This simple model includes many unrealistic assumptions such as:
1. An assumed simple word in which there are only two countries and two goods. In the real world, there are many countries and many goods.
2. Assuming away transportations costs between countries.
3. Assuming away differences in the prices of resources in different countries. We have said nothing about exchange rates simply assuming that cocoa and rice could be swapped on a one to one basis.
4. Assuming away that resources can move freely from the production of one good to another within a country. In reality, this is not always the case.
5. Assumed constant returns to scale, that is, the specialization by Ghana or South Korea has no effect on the amount of resources required to produce one ton of cocoa and rice. In reality, both diminishing and increasing returns to specialization exist. The amount of resources required to produce a good might decrease or increase as our nation specializes in production of that good.
6. It was assumed that each country has a fixed stock of resources and that free trade does not change the efficiency with which a country uses its resources. This is static assumption makes no allowances for the dynamic changes in a country’s stock of resources and in the efficiency with which the country uses its resources that might result from free trade.
7. The effects of trade on income distribution within a country were assumed away.
Given these assumptions, could the conclusion that free trade is mutually beneficial be extended to a world of many countries, goods, positive transportation costs, volatile exchange rates, immobile domestic resources, non-constant return specialization and dynamic changes? Although a detailed extension of the theory of comparative advantage is beyond the scope of this book,
The conclusion that free trade is universally beneficial is a rather bold one to draw from such a simple model (figure 6.2). This simple model includes many unrealistic assumptions such as:
1. An assumed simple word in which there are only two countries and two goods. In the real world, there are many countries and many goods.
2. Assuming away transportations costs between countries.
3. Assuming away differences in the prices of resources in different countries. We have said nothing about exchange rates simply assuming that cocoa and rice could be swapped on a one to one basis.
4. Assuming away that resources can move freely from the production of one good to another within a country. In reality, this is not always the case.
5. Assumed constant returns to scale, that is, the specialization by Ghana or South Korea has no effect on the amount of resources required to produce one ton of cocoa and rice. In reality, both diminishing and increasing returns to specialization exist. The amount of resources required to produce a good might decrease or increase as our nation specializes in production of that good.
6. It was assumed that each country has a fixed stock of resources and that free trade does not change the efficiency with which a country uses its resources. This is static assumption makes no allowances for the dynamic changes in a country’s stock of resources and in the efficiency with which the country uses its resources that might result from free trade.
7. The effects of trade on income distribution within a country were assumed away.
Given these assumptions, could the conclusion that free trade is mutually beneficial be extended to a world of many countries, goods, positive transportation costs, volatile exchange rates, immobile domestic resources, non-constant return specialization and dynamic changes? Although a detailed extension of the theory of comparative advantage is beyond the scope of this book,