Theory of International Trade: THE THEORY OF INTERNATIONAL TRADE
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Abstract
There are two broad themes in the theory of international trade. One is qualitative, being concerned with the pattern of trade, i.e. which country will export which good. The standard theory relates this to comparative advantage, i.e. to international differences in relative opportunity costs, and then tries to explain comparative advantage in terms of differences in technologies, factor supplies, etc. This theme is also concerned with the way in which trade in return affects such determinants of comparative advantage. The other theme is more quantitative, and seeks to explain the terms of trade, i.e. relative prices of exports and imports in a trading world. It also examines how they are affected by changes in data such as factor supplies or technology, and policies such as tariffs. While we have stated the themes as descriptive, it is clear that normative analyses will have to be based on, and will benefit from, a proper understanding of them. Questions of the state of the balance of payments, or of determination of exchange rates, can also be seen as elaborations and extensions of the same basic ideas. In developing these themes, one should bear in mind two important points. The first is that the very concepts of trade theory– relative costs and relative prices–call for consistent use of general equilibrium analysis. This need not always be Walrasian competitive analysis, but in a problem with several goods and factors, and several producing and consuming units, an approach which constantly reminds us of their mutual relationships is essential if errors of oversight are to be avoided. While obvious, this is sometimes forgotten.