International Trade Theory – Benefit from trade

All countries benefit from trade. If they did not, they would not trade.

It is often said that trade is good because all countries can benefit from it. But why is this? Surely if one country benefits from trade then another must lose out? The answer is that when two countries trade, they are better off than if they had not traded. This is because when a country trades, it can get goods and services that it would not otherwise have been able to get. For example, suppose Country A has lots of coal but no oil and Country B has lots of oil but no coal. If the two countries trade, Country A can get oil from Country B, and Country B can get coal from Country A. As a result, both countries are better off than they would have been if they had not traded. This is because trade allows countries to specialize in producing goods and services that they are good at producing and then to trade with other countries for the goods and services they are not producing. This specialization and trade results in all countries being better off.

Do you think the benefits from trade are shared equally among trading partners? 

Different types of trade theories suggest different things about how the benefits from trade are shared among trading partners. The most basic theory, the Ricardian model, suggests that the benefits from trade are not shared equally. Instead, they tend to be skewed in favor of the country with the comparative advantage. More sophisticated versions of the Ricardian model, known as the Heckscher-Ohlin model, consider factors such as different levels of technology and factor endowments between countries. This model suggests that the benefits from trade are shared more evenly among countries, although there may still be some bias in favor of the country with the higher level of technology. The newest and most comprehensive trade theory is the New Trade Theory, which considers comparative advantage and other factors such as scale economies and product differentiation. This theory suggests that the benefits from trade can be shared fairly evenly between trading partners, provided that there are no major barriers to entry. In conclusion, it is difficult to say definitively how the benefits from trade are shared among trading partners. However, it seems likely that the newer trade theories – which consider a wider range of factors – provide a more accurate picture than the older, simpler models.

Do you think everyone within a country benefits from trade? 

When a country engages in international trade, not everyone within the country necessarily benefits from the trade. This is because the gains from trade are not distributed evenly among the people within a country. Instead, the benefits of international trade are typically concentrated among certain groups of people within a country. In contrast, other groups may be worse off due to the trade. For example, consider a country that exports manufactured goods to other countries. The people working in the manufacturing sector are likely to see their jobs and wages increase due to the increased demand for their goods. On the other hand, those working in sectors that compete with manufacturing (such as agriculture) may see their jobs and wages decrease due to competition from cheaper manufactured goods. In general, it is typically the case that those who directly benefit from international trade tend to be more educated and have more skilled jobs. In contrast, those hurt by international trade tend to be less educated and have less skilled jobs. This is because skilled workers are more likely to be employed in sectors that benefit from international trade. In contrast, unskilled workers are more likely to be employed in sectors hurt by international trade.


Greenlaw, S. & Shapiro, D. (2017). Chapter 19 | Macroeconomics policy around the world. In Principals of macroeconomics 2e. Openstax. Licensed under CC-BY 4.0. 

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