Modern Theories of Trade — 2: Imperfect Competition

Abstract

The purpose of this chapter is to further our study into the origins of trade in line with empirical observations of the actual patterns of the world trade. So far we have identified two motivations for international trade: (1) differences between countries that give rise to comparative advantage which leads to specialisation and trade, and (2) external EOS that, irrespective of comparative advantages, give rise to geographical concentration of production, which in turn induces international trade. The models which incorporate either of these two motivations are based on perfect competition — a market structure that is traditionally assumed in trade theory, despite the fact that it became harder and harder to give a real-world justification for this assumption.