ABSTRACT
The conventional assumptions of neoclassical trade theory (1.3.3) are essential to the conclusion that free trade maximizes national welfare. Therefore, as soon as even one of these assumptions is discarded we need to ask whether free trade is still welfare-optimal from the perspective of an individual country.1, 2
In line with the relevant assumptions, the deviations from the ideal model can be broken down into two large groups: those at the national level and those at the international level. Deviations at the international level include discarding the small country assumption (2.1) and discarding the factor-immobility assumption (2.2). Deviations at the national level include, in particular, discarding the assumption of perfect factor markets and of perfect commodity markets, including the existence of externalities (2.3), intersectoral factor immobility and factor price rigidity (2.4), as well as the phenomenon of market power in the national commodity markets, as modelled by the ‘new trade theory’ (2.5).3
