Gains from Trade - Key Assumptions

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.

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