What assumptions underlie the theories of specialization in international trade? What are the limitations of these assumptions?
Answer: The assumptions that underlie the theories of specialization in international trade include the following:
a. Full employment: When countries have many unemployed or unused resources, they may seek to restrict imports to employ or use idle resources.
b. Economic efficiency: Countries may pursue objectives other than output efficiency. They may avoid overspecialization because of the vulnerability created by changes in technology.
c. Division of gains: If a country perceives a trading partner is gaining too large a share of benefits, it may forgo absolute gains for itself so as to prevent relative losses.
d. Two countries, two commodities: Two countries trading only two commodities is unrealistic.
e. Transport costs: If it costs more to transport the goods than is saved through specialization, then the advantages of trade are negated.
f. Statics and dynamics: The relative conditions that give countries advantages or disadvantages in the production of given products are dynamic, not static, as the theories view countries' advantages.
g. Services: An increasing portion of world trade is in services, and the theories deal with commodities.
h. Production networks: Specialization may take place by function or by component as well as by final product.
i. Mobility: The assumption that resources can move domestically from the production of one good to another, and at no cost, is not completely valid.