International Trade

Abstract

Edgeworth (1894) opened his survey of the theory of international values with the provocative statement: ‘International trade meaning in plain English trade between nations, it is not surprising that the term should mean something else in Political Economy’. This could equally well be said today. What distinguishes international from domestic trade is the greater prevalence of barriers (both natural and artificial) to trade and factor movements in the former; different currencies; and (perhaps most important) autonomous governments, leading to a pattern of shocks which impact different countries in different ways. Because of these differences, a different type of theoretical model is called for. For example, international immobility of factors results in greater disparity in relative factor endowments among countries than among regions of the same country; these disparities may make it reasonable, as a first approximation, to ignore variations in supplies of factor services that come about in response to changes in factor rentals and commodity prices, if these variations are small in comparison with the differences in endowments. Likewise, great differences among resource endowments and productive techniques may make it reasonable to disregard differences in consumers’ tastes within and across countries, even though this might be a very inappropriate type of simplification for purposes of analysing domestic trade.