Why Do the Free Trade Gain Numbers Differ So Much? The Role of Industrial Organization in General Equilibrium.

A small general equilibrium model calibrated approximately to match the Canadian tradeable goods sector is used to examine the implications of a range of assumptions about pricing behavior and entry barriers for the impact of free trade with the United States. It turns out that only a model with an extreme combination of non-competitive product market and free entry (as well as unexploited scale economies) can generate substantial gains from free trade. Other assumptions modeled include: monopolistic competition, market share pricing, an "economists's" model, and a "mainstream industrial organization" approach. The predicted welfare gains range from zero to more than 7 percent of GNP.