Since its exposition by David Ricardo[7] the techniques of neo-classical economics have been applied to it to model the patterns of trade that would result from various postulated sources of comparative advantage.
[citation needed] The best-known of the resulting models, the Heckscher-Ohlin theorem (H-O)[8] depends upon the assumptions of no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies.
On those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the relative abundance of labour and capital (referred to as factor endowments).
Large numbers of learned papers have been produced in attempts to elaborate on the H–O and Stolper–Samuelson theorems, and while many of them are considered to provide valuable insights, they have seldom proved to be directly applicable to the task of explaining trade patterns.
Another econometric study also established a correlation between country size and the share of exports made up of goods in the production of which there are scale economies.
[15] The study further suggested that internationally traded goods fall into three categories, each with a different type of comparative advantage: There is a strong presumption that any exchange that is freely undertaken will benefit both parties, but that does not exclude the possibility that it may be harmful to others.
However (on assumptions that included constant returns and competitive conditions) Paul Samuelson has proved that it will always be possible for the gainers from international trade to compensate the losers.
[16] Moreover, in that proof, Samuelson did not take account of the gains to others resulting from wider consumer choice, from the international specialisation of productive activities - and consequent economies of scale, and from the transmission of the benefits of technological innovation.
An OECD study has suggested that there are further dynamic gains resulting from better resource allocation, deepening specialisation, increasing returns to R&D, and technology spillover.
Samuelson's factor price equalisation theorem indicates that, if productivity were the same in both countries, the effect of trade would be to bring about equality in wage rates.
Influential studies published in 1950 by the Argentine economist Raul Prebisch[21] and the British economist Hans Singer[22] suggested that there is a tendency for the prices of agricultural products to fall relative to the prices of manufactured goods; turning the terms of trade against the developing countries and producing an unintended transfer of wealth from them to the developed countries.
[23] The Prebisch/Singer findings remain controversial, but they were used at the time—and have been used subsequently—to suggest that the developing countries should erect barriers against manufactured imports in order to nurture their own "infant industries" and so reduce their need to export agricultural products.
[28] It has also been pointed out that, in any case, trade restrictions could not be expected to correct the domestic market imperfections that often hamper the development of infant industries.
[33] OECD economists estimate that cutting all agricultural tariffs and subsidies by 50% would set off a chain reaction in realignments of production and consumption patterns that would add an extra $26 billion to annual world income.
[34][full citation needed] Quotas prompt foreign suppliers to raise their prices toward the domestic level of the importing country.
When quotas were banned under the rules of the General Agreement on Tariffs and Trade (GATT), the United States, Britain and the European Union made use of equivalent arrangements known as voluntary restraint agreements (VRAs) or voluntary export restraints (VERs) which were negotiated with the governments of exporting countries (mainly Japan)—until they too were banned.
Tariffs have been considered to be less harmful than quotas, although it can be shown that their welfare effects differ only when there are significant upward or downward trends in imports.
The practice of international finance tends to involve greater uncertainties and risks because the assets that are traded are claims to flows of returns that often extend many years into the future.
And, because of the incidence of rapid change, the methodology of comparative statics has fewer applications than in the theory of international trade, and empirical analysis is more widely employed.
[citation needed] A major change in the organisation of international finance occurred in the latter years of the twentieth century, and economists are still debating its implications.
Their recommended economic policies are broadly those that have been adopted in the United States and the other major developed countries (known as the "Washington Consensus") and have often included the removal of all restrictions upon incoming investment.
The Fund has been severely criticised by Joseph Stiglitz and others for what they consider to be the inappropriate enforcement of those policies and for failing to warn recipient countries of the dangers that can arise from the volatility of capital movements.
A Copenhagen Consensus study suggests that if the share of foreign workers grew to 3% of the labour force in the rich countries there would be global benefits of $675 billion a year by 2025.
[50] However, a survey of the evidence led a House of Lords committee to conclude that any economic benefits of immigration to the United Kingdom are relatively small.
[52] From the standpoint of a developing country, the emigration of skilled workers represents a loss of human capital (known as brain drain), leaving the remaining workforce without the benefit of their support.
That effect upon the welfare of the parent country is to some extent offset by the remittances that are sent home by the emigrants, and by the increased skill and education with which some of them return.
One study introduces a further offsetting factor to suggest that the opportunity to migrate fosters enrolment in education thus promoting a "brain gain" that can counteract the lost human capital associated with emigration.
As evidence from Armenia suggests, instead of acting as a contractual tool, remittances have a potential for recipients to further incentivize emigration by serving as a resource to alleviate the migration process.
The Mundell–Fleming model and its extensions[61] are often used to analyse the role of capital mobility (and it was also used by Paul Krugman to give a simple account of the Asian financial crisis[62]).
[67] An extensive critical analysis of these contentions has been made by Martin Wolf,[68] and a lecture by Professor Jagdish Bhagwati has surveyed the debate that has taken place among economists.