Factor Market Imperfections
There is a general agreement among economists that perfect competition is a ‘myth’. Yet the bulk of the analysis in trade theory — and economic theory in general — has been carried out under this ‘mythical’ assumption. Perhaps the best case that can be made for a perfect market is that it provides an ‘ideal’ yardstick to evaluate the efficiency of existing systems which generally fail to satisfy the stringent requirements of competitive conditions. This suggests that the assumption of perfect markets, which up to the previous chapter contributed much to the simplicity of our analysis, stands in need of replacement. Relaxing this assumption in turn permits a wide variety of production systems such as monopoly, oligopoly, imperfect factor markets, etc., all of which, individually or collectively, may characterise the production side of a country. In order to bring the analysis down to manageable proportions, some selectivity in the choice of alternative systems is unavoidable. In this chapter we relax the assumption of perfect factor markets, while product markets continue to be perfect. The discussion of the product market distortions is postponed until the next chapter.
KeywordsFactor Intensity International Trade Free Trade Relative Price Wage Differential
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