Topic Videos

Gains from Trade - Key Assumptions

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 2 Oct 2020

Trade theory at A-level and IB rests upon several important assumptions. This video provides a brief summary of them and how they can be challenged for strong evaluation.

Gains from Trade - Key Assumptions

Assumptions behind the standard theory of comparative advantage, specialisation and trade

  • Constant returns to scale – i.e. no economies of scale – which might amplify (increase) the gains from trade
  • Factor mobility between industries (geographical + occupational mobility) workers are assumed to be equally productive in whatever industry / job they do and then can switch work easily
  • No trade barriers such as import tariffs and import quotas and other trade frictions (non-tariff barriers)
  • Low transportation costs to get products to market – high logistics costs might erode any comparative advantage between nations
  • No externalities from production and/or consumption

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