Lesson 5A

by Steven Suranovic ©1997-2006

Trade 5-5A 





The main support for free trade arises because free trade can raise aggregate economic efficiency.

In most models of trade there is an improvement in aggregate efficiency when an economy moves from autarky to free trade. This is the same as an increase in national welfare. Efficiency improvements can be decomposed into two separate effects: production efficiency and consumption efficiency. An improvement in production efficiency means that countries can produce more goods and services with the same amount of resources. In other words, productivity rises for the given resource endowments available for use in production. Consumption efficiency improvements mean, in essence, that consumers will have a more satisfying collection of goods and services from which to choose.

Many economists define the objective of the economics discipline as seeking to identify the best way to use scarce resources to satisfy the needs and wants of the people of a country. Economic efficiency is the term economists use to formally measure this objective. Since free trade tends to promote economic efficiency is so many models, this is one of the strongest arguments in support of free trade.

This result is formally demonstrated in the Ricardian model (see page 40-9b), the Immobile Factor model (see page 70-15), the Specific Factor model, the Heckscher-Ohlin model (see page 60-10), the Demand Difference model, the simple Economies of Scale model, (see page 80-3) and the Monopolistic Competition model (see page 80-5e). It can also be demonstrated when a small country reduces barriers to trade (Consider the analysis on page 90-11 in reverse). Each of these models shows that a country can have a larger national output (i.e. GDP) and superior choices available in consumption as a result of free trade.

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International Trade Theory and Policy Lecture Notes: ©1997-2006 Steven M. Suranovic Last Updated on 6/13/06