International Trade - Theory and Policy, 2010a

the results from any one model. Instead, the argument is based on a collection of results from numerous
trade models, which are interpreted in reference to realistic situations. If one considers the collection of
all trade models jointly, it is much more difficult to contend that they miss realistic features of the world.
Trade theory (as a collection of models) does consider imperfectly competitive markets, dynamic effects of
trade, externalities in production and consumption, imperfect information, joint production, and many
other realistic features. Although many of these features are absent in any one model, they are not absent
from the joint collection of models, and it is this “extended model” that establishes the argument for free
trade. [2]
KEY TAKEAWAY
The modern support for free trade by most economists is based on a collection of results from a
collection of models that incorporate many realistic features of the world into the analysis.
EXERCISE
1. Jeopardy Questions. As in the popular television game show, you are given an answer to a
question and you must respond with the question. For example, if the answer is “a tax on
imports,” then the correct question is “What is a tariff?”
1. The statement suggested by Paul Krugman as being an element of the economist’s
creed—if ever there were such a thing.
2. This is who will benefit from free trade according to a simplistic view held by some free trade
advocates.
3. This is what causes unrealistic conclusions in trade theory according to some free trade
opponents.
4. The conclusions of one model of international trade or manymodels of international trade are
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best used to make trade policy prescriptions.
[1] See Paul Krugman, “Is Free Trade Passe?” Journal of Economic Perspectives 1, no. 2 (1987): 131–44.
[2] Ideally, we would create a supermodel of the world economy that simultaneously incorporates all realistic
features of the world and avoids what are often called “simplifying assumptions.” Unfortunately, this is not a
realistic possibility. As anyone who has studied models of the economy knows, even models that are very simple in
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