Welfare Effects of Free Trade

There are two ways to evaluate the welfare effects of trade in the Ricardian model. The first method evaluates the real wages of workers as two countries move from autarky to free trade. It is shown that the purchasing power of all workers wages in both coutries would rise in moving to free trade.

Real Wage Effects

The second, more traditional, method uses an aggregate welfare function to depict the aggregate welfare effects that would accrue to the nation. This method allows one to demonstrate the benefits that arise out of increased production and consumption efficiency.

Aggregate Welfare Effects

International Trade Theory and Policy - Chapter 40-9: Last Updated on 8/20/03