What is Free Trade?

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Recommended: Advantages of free trade in International Political Economy

What is free trade? Free trade is international trade of goods and services without tariffs or other trade barriers. Krugman (1987) in Is Free Trade Passé looking for a real free trade which is depend on perfect competition and constant returns. Nowadays, countries are more likely to follow Strategic Trade Policy that give domestic firms, households or factors of production an advantage over foreign ones.
Comparative advantage theory has many assumptions one of them is constant returns, it is traditional models of international trade. Constant returns is the changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor). If output increases by that same proportional change then there are constant returns to scale. For example, suppose our inputs are capital or labor, and we double each of these, our output will be exactly double.
Perfect competition a market structure characterized by a large number of firms so small relative to the overall size of the market, such that no single firm can affect the market price or quantity exchanged. Perfect competition and constant returns go together; without constant returns, the assumption of perfect competition becomes very hard to work. Nowadays, the idea of constant returns has moved because according to, Krugman (1987) "in the last ten years the traditional constant returns, perfect competition of international trade have been supplemented and to some extent supplanted by new breed of models that emphasizes increasing returns and imperfect competition"(p. 131). In modern economics perfect competition cannot hold up because country more likely to use increasing returns rather than constant returns. Imperfect competition lead to o...

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...echnology which benefits everyone. Also in economic side free trade provides free and open transaction of goods and services between the countries, and consumers are able to access more and better goods and companies are able to sell products to more people around the world. Also I see that, free trade creates an influx of wealth and employment for all. On the other hand, some country may profit more than others country through free trade.
In conclusion, the traditional models in international trade of constant returns to scale and perfect competition have been supplement by new models which is increasing returns and imperfect competition. Free trade in not passé, but its lost its innocence; free trade is still a good police. However, the world of economy improved, and free trade should improve as well. "free trade is better than no trade" as Krugman pointed out.

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