Q. It is argued that the United States could be foolish to maintain a free-trade stance in a world in which all other countries exploit prisoner or child labor, or are protectionist. On the other hand, Ricardo's classic demonstration of the effects and sources of comparative advantage cogently demonstrates that regardless of other country policy, free trade remains the first best policy for a country to follow, since it will maximize its consumption possibilities (conditional upon other country policies). Illustrate the contradiction with the argument in the preceding paragraph.

Answer: In the circumstance of the Ricardian model it is true that gains from trade are severely a result of world terms of trade which vary from domestic marginal rates of substitution. In such a world the cause why foreign goods are cheap is of no concern to domestic consumers. Though in worlds which permit for large-scale labour migration ignoring labour condition abroad may eventually result in living standards for domestic workers to be dragged down.

Presume that Airbus (European Union) and Boeing (U.S.) both hope to enter the Hungarian market with the next new generation airliner. They both have identical demand and cost conditions (as indicated in the graph above).