Introduction
"Economies that sign free trade agreements tend to see an increase in their overall growth rates of about 0.6 percent annually during the first five years after implementation ? gross domestic product is about 3 percent higher at the end of five years as a result of an agreement" (DR-CAFTA).
Trade liberalization is becoming more prevalent around the globe. Many argue its shortcomings and benefits for all parties involved, but none can argue the theoretical and empirical evidence arguing for free trade between specializing nations. Although no model perfectly represents what truly happens in the real world, it can begin to show the direction in which a nation needs to follow to benefit from free trade. Developed countries are practically guaranteed to benefit from free trade, but it is also true the developing countries benefit. With financial help in the form of investment and the formation of regulations and policies, developing countries can benefit just as much from trade as already developed countries.
Economic Models for Trade:
Ricardian Model
To fully understand free trade, it is important to understand the modern economic models that attempt to explain it and show its significance. The most basic model for trade is the Ricardian Model, developed by David Ricardo. By using the idea of comparative advantage, the Ricardian model begins to shape the theory that trade between nations is in fact desirable. This model starts with a straight line representing the production possibilities for two goods within a nation. The straight line covers the assumptions that consumers have no preference between imported and domestic goods, and that there is perfect competition between these two countries and each country has a fixed ...