Question

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1) What models do economists use to justify free trade? Please present at least one and discuss the pros and cons of the model.

Answer 1

The most significant model that has been introduced to support free trade is the Heckscher Ohlin model. The model states that each country must export that commodity which intensively uses the country's more abundant resource. Thus the model professes that each country should engage in free trade and do so in the commodity which uses the country's resources fruitfully. For instance of a country produces 2 goods jackets and tanks, and jackets use labour mainly then the country should export jackets if labour is the nations most abundant resource. The problem with such an arrangement is that the abundant resource may not always produce the best commodity suitable for trade. This is where the model breaks down. The Heckscher Ohlin model however has been widely used and provides support for the use of the Stolper Samuelson theorem and the factor price equalization theorem. The model however has its flaws in terms of the ideal product to be chosen for export.