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The Gains from Foreign Trade: The Fundamental Theorem

In: The Distorted Economy

Author

Listed:
  • Hans C. Blomqvist
  • Mats Lundahl

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.

Suggested Citation

  • Hans C. Blomqvist & Mats Lundahl, 2002. "The Gains from Foreign Trade: The Fundamental Theorem," Palgrave Macmillan Books, in: The Distorted Economy, chapter 3, pages 39-52, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-4039-1434-7_3
    DOI: 10.1057/9781403914347_3
    as

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