The Article Is Free Trade Passe - Free Sample Assignment

Question: Describe about the Article "Is Free Trade Passe"? Answer: Critical Review of Is Free Trade Pass? P.R. Krugman has focused on scrutinizing the challenges of classical trade theory and has been able to deliver an alternative on the basis of the assumptions of classical trade theory in the article, Is Free Trade Pass? The author has argued that there is an opportunity for setting free trade as a good policy (Krugman, 1987). It has been found that the concept of international trade theory was significantly dominated by the concept of the competitive advantages in the early and mid 19th century. This article has analyzed the formal models where it was assumed that the economies will be characterized with the extent of perfect competition and the constant return to the scale. Analyzing these assumptions, it can be stated that the trade can take place only if there is a significant difference in the technology, taste and factor endowments. For example, according to the traditional trade model known as Richardian model, trade can arise when there is a significant difference in terms of technology between various nations. O the other hand, the Heckscher-Ohlin-Samuelson model has tagged the distinction in the factor endowments as the major reason for facilitating trades. These economic trade models have different implications. In case of Richardian model the effect of income distribution has been ignored while it is prominent in case of Heckscher-Ohlin-Samuelson model. P. R. Krugman has clearly identified that comparative advantage cannot be the entire story and the in this article it has been stated that increasing return can be an independent reason for the international trade. This point was identified by Ohlin. Therefore, various empirical studies have identified the limitations of the formal trade theory. The set of informal arguments in the genre of international trade research, a counter culture was observed (Gandolfo Trionfetti, 2013). The researchers who has attempted to consider the formal trade theories under the increasing returns, they were encountering the issues regarding the modeling of market structure. Till 1970s no way was there for modeling imperfect competition in the general equilibrium. P. R. Krugman has identified that that the past research works in the field of international trade has not been able to recognize the fact that trade may take place apart from the significant difference in terms of technology, taste and factor endowments. Therefore, additional modes can be generated through different assumptions regarding the factors and number of goods by imposing restriction in case of technology and so forth (Zhang Zhang, 2008). Later the models of imperfect competition was started to develop. It has been observed that the newly developed model has provided the essential framework needed for the formal modeling of the function of enhancing return as the reason behind international trade. Additionally, some papers were published which state that the economies of scale is responsible for leading to the arbitrary specialization by countries on the goods and services within a monopolistic and competitive industry. These models have clearly argued that the differences are not the sole cause behind international trade. It has been argued that the enhancing return must be considered as an important as well as independent force for facilitating the regional concentration for producing the goods. Hence, it can be stated that as competitive advantage, increasing returns is also considered as the primary reason for international trade. Development of new ideas helped in the clarifying the role of enhancing return in global trade. Additionally, it has recognized the significance of imperfect completion along with the economies of scale in case of the international trade. It has not only showed that free trade is better than the sophisticated government intervention. It focused on the fact that in case of laissez faire economy, free trade can be considered as the best of all the probable policies. The new perspective of the global trade focuses on the economies of scale instead of comparative advantage. This new model has identified two major challenges of free trade. According to the new idea, the strategic trade policy argues that the government policy can tilt the terms of the oligopolistic competition for shifting the additional returns from the foreign to the domestic organizations (Gandolfo Trionfetti, 2013). On the other hand, the former model argued that the government policy needs to favor the industries which are responsible for yielding externalities, especially knowledge. The positive economy of the new trade theory has focused in the fact that several global markets are imperfectly competitive and the factor of increasing return. The new model has received criticism regarding the judgments of the politics of the new trade policy. First of all, it has been argued that it is next to impossible to develop policies given in the empirical difficulties associated with the modeling of imperfect markets. Secondly, another criticism of the new model has been received regarding the entry. It has been argued that any kind of advantages from the intervention will be dispersed by the entrance of the rent seeking organizations. Next, it has been argued that the general consideration of the equilibrium has radically increased the empirical difficulty in order to formulate the trade policy (Krugman Obstfeld, 2000). The author has considered both the appreciation and criticism of the policy. It has been found that the new model is different from the old argument which stated that free trade is found to be optimal as the markets are efficient. This new model has considered the free trade as a rule of thumb in the conditions where the politics are also imperfect as its market (Zhang Zhang, 2008). According to Krugman, the economic cautions are found to be crucial to this argument. Hence, it can be inferred that the comparative advantage is an incomplete model for the international trade. Therefore, it must be considered that free trade is not a right policy. It can be concluded that free trade is not outdated. Bibliography Gandolfo, G., Trionfetti, . (2013). International Trade Theory and Policy. Springer. Krugman, P. R. (1987). Is Free Trade Passe? The Journal of Economic Perspectives , 1 (2), 131-144. Krugman, P., Obstfeld, M. (2000).International economics. Reading Mass.: Addison-Wesley. Zhang, W., Zhang, W. (2008).International trade theory. Berlin: Springer.