The Gains from Foreign Trade: The Fundamental Theorem

Hans C. Blomqvist and Mats Lundahl

Chapter 3 in The Distorted Economy, 2002, pp 39-52 from Palgrave Macmillan

Abstract: Abstract An old truth, but still one of the cornerstones in the theory of international trade, is that free trade under laissez-faire constitutes the optimal trade policy, provided that prices are flexible, production factors domestically mobile, the country cannot influence its terms-of-trade and all markets operate under conditions of perfect competition. However, free trade under laissez-faire is not the best policy in situations where some kind of distortions exist in the commodity or factor markets. (We will provide examples in next chapter.) In such cases better results are obtained with the aid of policy interventions of different kinds. Before we examine how these interventions work, we will investigate the condition that must be met if we are to achieve the highest possible welfare level in the open economy.

Keywords: International Trade; Free Trade; Foreign Trade; Relative Price; Fundamental Theorem (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-4039-1434-7_3

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DOI: 10.1057/9781403914347_3

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