The concept of that all countries will be benefited from the international, no matter what the circumstances are, that was one of the facts that all economists have been talking about. The theory of international trade relied on comparative advantage; the well-known feature that advantages countries took a part in the commercial trade. But the traditional theory of international trade, forced some of restricted conditions to the analysis of the international trade, for example, the concept of perfect competition and constant returns.
Most of the economists believed that they can come up with conclusions about the international trade through reporting to perfect competition (Richardson, 1990, p. 108). However, in reality this assumption is contradicted in most of the cases. The markets majority are not actually in perfect competition, in fact they are in imperfect competition where monopolistic competition, oligopoly and monopoly took place. As a result, firms reach economies of scale. Returns were highly increased, much more than the volume of production growth (Burnete, 2007, p. 137).
The new trade theory has underlined some reasons that required the governments intervention in the international trade to fit its purpose of being advantageous for all countries (Krugman, 1989, p. 2).The question that Krugman (1987) asked in his article is Free Trade Passé? Sounds like a challenge directed to the traditional trade theory, underlying a basic change of the concept and questioning about the necessity of concluding a new theory that fit to the characteristics of the current international trade (Burnete, 2007, p. 136).
The common understanding that the world running on perfect competition is a no longer exist. Actually, Krugman highlighted in his article that economists still believe the concept of perfect competition and free trade (Krugman, 1987), since this concept has become the foundation of international economics. Now the world starts questioning reliability of the perfect competition concept. It became very obvious that even the United States has lost their believe in the free trade idea and no longer feel the obligation toward it. It’s also important to take into consideration the total number of firms in the international market against the domestic market; it doesn’t always work for small firms the perfect competition and free trade.
These small firms, or the firms that don’t always achieve a true advantage, there are too much criticism of perfect competition. The most discussed idea is that the government should interfere in order to enforce a strong external economy and at the same time avoid negative impact on another country economy. The protection of the government makes it so different from perfect competition because that involves government intervention through the implementation of tariffs and the financing of subsidies for markets in which a specific country has an advantage....