As its name implies, international trade is the exchange of products, services, and money across national borders; essentially

trade between countries. When consumers in the U.S. purchase Swiss-made watches, Guatemalan-grown fruits, Chinese-made toys and electronics, and Japanese-manufactured automobiles, they experience the end result of international trade. Also known as foreign trade, international trade has been maintained since the dawn of time. Trading goods were transported on the backs of tradesmen across tribal boundaries, and bartered and sold among neighboring, and, hopefully, accommodating tribesmen. The Silk Road between Europe and Asia is one example of the sometimes beneficial, sometimes troubling essentials of international trade. Asian silks and spices were traded for European technology and weapons, with varying benefits and consequences. Domestic trade is the purchase and sale of products and services within a particular nations borders, and is inherently limiting to a modern national economy. International trade, conversely, raises national gross domestic product (GDP) by providing vastly expanded economic opportunity. It is, therefore, incumbent upon the global economic community to promote fair trade between nations. In addition, the ability of nations to trade freely with all others is also vital for profits. Free trade, fair trade, and profits are the cornerstones of global economic well-being.

Ricardian model Further information: Ricardian economics The Panama Canal is important for international sea trade between the Atlantic Ocean and thePacific Ocean. The Ricardian model focuses on comparative advantage, perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best. Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country. The main merit of Ricardian model is that it assumes technology differences between countries. [citation
needed]

Technology gap is easily included in the Ricardian and Ricardo-Sraffa model (See the Ricardian theory (modern

development)). The Ricardian model makes the following assumptions:

1. 2.

Labor is the only primary input to production (labor is considered to be the ultimate source of value). Constant Marginal Product of Labor (MPL) (Labor productivity is constant, constant returns to scale, and simple technology.)

3. 4. 5.

Limited amount of labor in the economy Labor is perfectly mobile among sectors but not internationally. Perfect competition (price-takers).

The Ricardian model measures in the short-run, therefore technology differs internationally. This supports the fact that countries follow their comparative advantage and allows for specialization. For the modern development of Ricardian model, see the subsection below: Ricardian theory of international trade. [edit]Heckscher-Ohlin model

Main article: Heckscher-Ohlin model In the early 1900s an international trade theory called factor proportions theory emerged by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory is also called the Heckscher-Ohlin theory. The Heckscher-Ohlin theory stresses that countries should produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. This theory differs from the theories of comparative advantage and absolute advantage since those theories focus on the productivity of the production process for a particular good. On the contrary, the Heckscher-Ohlin theory states that a country should specialize production and export using the factors that are most abundant, and thus the cheapest. Not to produce, as earlier theories stated, the goods it produces most efficiently. The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. Despite its greater complexity it did not prove much more accurate in its predictions. However from a theoretical point of view it did provide an elegant solution by incorporating the neoclassical price mechanism into international trade theory. The theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, known as the Leontief paradox, were exposed in empirical tests by Wassily Leontief who found that the United States tended to export labor intensive goods despite having a capital abundance. The H-O model makes the following core assumptions:

1. 2. 3. 4. 5. 6.

Labor and capital flow freely between sectors The production of shoes is labor intensive and the production of computers is capital intensive The amount of labor and capital in two countries differ (difference in endowments) Free trade Technology is the same across countries (long-term) Tastes are the same.

The problem with the H-O theory is that it excludes the trade of capital goods (including materials and fuels). In the H-O theory, labor and capital are fixed entities endowed to each country. In a modern economy, capital goods are traded internationally. Gains from trade of intermediate goods are considerable, as it was emphasized by Samuelson (2001). [edit]Reality and Applicability of the Heckscher-Ohlin Model The Heckscher-Ohlin theory is preferred to the Ricardo theory by many economists, because it makes fewer simplifying assumptions.[citation needed] In 1953, Wassily Leontief published a study, where he tested the validity of the Heckscher-Ohlin theory.[2] The study showed that the U.S was more abundant in capital compared to other countries, therefore the U.S would export capital- intensive goods and import labour-intensive goods. Leontief found out that the U.S's export was less capital intensive than import. After the appearance of Leontief's paradox, many researchers tried to save the Heckscher-Ohlin theory, either by new methods of measurement, or either by new interpretations. Leamer[3] emphasized that Leontief did not interpret HO theory properly and

claimed that with a right interpretation paradox did not occur. Brecher and Choudri [4] found that, if Leamer was right, the American workers consumption per head should be lower than the workers world average consumption. Many other trials followed but most of them failed.[5][6] Many famous textbook writers, including Krugman and Obstfeld and Bowen, Hollander and Viane, are negative about the validity of H-O model.[7][8] After examining the long history of empirical research, Bowen, Hollander and Viane concluded: "Recent tests of the factor abundance theory [H-O theory and its developed form into many-commodity and many-factor case] that directly examine the H-O-V equations also indicate the rejection of the theory."[8]:321 Heckscher-Ohlin theory is not well adapted to the analyze South-North trade problems. The assumptions of HO are less realistic with respect to N-S than N-N (or S-S) trade. Income differences between North and South is the one that third world cares most. The factor price equalization [a consequence of HO theory] has not shown much sign of realization. HO model assumes identical production functions between countries. This is highly unrealistic. Technological gap between developed and developing countries is the main concern of the poor countries.[9] [edit]Specific factors model In this model, labor mobility between industries is possible while capital is immobile between industries in the short-run. Thus, this model can be interpreted as a 'short run' version of the Heckscher-Ohlin model. The specific factors name refers to the given that in the short-run, specific factors of production such as physical capital are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms; in other terms, the international trade is the biggest network on the earth. Additionally, owners of opposing specific factors of production (i.e. labor and capital) are likely to have opposing agendas when lobbying for controls over immigration of labor. Conversely, both owners of capital and labor profit in real terms from an increase in the capital endowment. This model is ideal for particular industries. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade. [edit]New Trade Theory Main article: New Trade Theory New Trade Theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (i.e. foreign direct investment) which exists. New Trade theories are often based on assumptions like monopolistic competition and increasing returns to scale. One result of these theories is the home-market effect, which asserts that, if an industry tends to cluster in one location because of returns to scale and if that industry has high transportation costs, the industry will be located in the country with most of its demand to minimize cost. [edit]Gravity model Main article: Gravity model of trade The Gravity model of trade presents a more empirical analysis of trading patterns rather than the more theoretical models discussed above. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries' economic sizes. The model mimics the Newtonian law of gravity which also considers distance and

physical size between two objects. The model has been proven to be empirically strong through econometric analysis. Other factors such as income level, diplomatic relationships between countries. [edit]Ricardian theory of international trade (modern development) The Ricardian theory of comparative advantage became a basic constituent of neoclassical trade theory. Any undergraduate course in trade theory includes expansions of Ricardo's example of four numbers in form of a two commodity, two country model. This model was expanded to many-country and many-commodity cases. Major general results were obtained by the beginning of 1960's by McKenzie[10] and Jones,[11] including his famous formula. It is a theorem about the possible trade pattern for Ncountry N-commoditty cases. Let aij be the labor input coefficent for a country i and for the industry j (or for the production of good j). If a trade pattern i country specialises in i industry, then the product a11 a22 ... aNN is strictly smaller than any permutation products of the form a1(1) a2(2) ... aN(N) for any perumutation except the identity permuation which transforms i onto i. [edit]Contemporary theories Ricardo's idea was even expanded to the case of continuum of goods by Dornbusch, Fischer, and Samuelson[12] This formulation is employed for example by Matsuyama [13] and others. These theories uses the special property which is applicable only for the two country case. [edit]Neo-Ricardian trade theory Inspired by Piero Sraffa, a new strand of trade theory emerged and was named neo-Ricardian trade theory. The main contributors include Ian Steedman (1941-) and Stanley Metcalfe (1946-). They have criticized neoclassical international trade theory, namely the Heckscher-Ohlin model on the basis that the notion of capital as primary factor has no method of measuring it before the determination of profit rate (thus trapped in a logical vicious circle). [14] This was a second round of the Cambridge capital controversy, this time in the field of international trade.[15] The merit of neo-Ricardian trade theory is that input goods are explicitly included to the analytical framework. This is in accordance with Sraffa's idea that any commodity is a product made by means of commodities. The limit of their theory is that the analysis is limited to small country cases. [edit]Traded intermediate goods Ricardian trade theory ordinarily assumes that the labor is the unique input. This is a great deficiency as trade theory, for the intermediate goods occupy the major part of the world international trade. Yeats [16] found that 30% of world trade in manufacturing is intermediate inputs. Bardhan and Jafee[17] found that intermediate inputs occupy 37 to 38% in the imports to the US for years 1992 and 1997, whereas the percentage of intrafirm trade grew from 43% in 1992 to 52% in 1997. McKenzie[18] and Jones[19] emphasized the necessity to expand the Ricardian theory to the cases of traded inputs. In a famous comment McKenzie (1954, p. 179) pointed that "A moment's consideration will convince one that

Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England."[20] Paul Samuelson[21] coined a term Sraffa bonus to name the gains from trade of inputs. [edit]Ricardo-Sraffa trade theory John Chipman observed in his survey that McKenzie stumbled upon the questions of intermediate products and discovered that "introduction of trade in intermediate product necessitates a fundamental alteration in classical analysis."[22] It took many years until recently Y. Shiozawa[23] succeeded to remove this deficiency. The Ricardian trade theory was now constructed in a form to include intermediate input trade for the most general case of many countries and many goods. This new theory is called Ricardo-Sraffa trade theory. It is emphasized that the Ricardian trade theory now provides a general theory which includes trade of intermediates such as fuel, machine tools, machinery parts and processed materials. The traded intermediate goods are then used as inputs of productions in the importing country. Capital goods are nothing other than inputs to the productions. Thus, in the Ricardo-Sraffa trade theory, capital goods moves freely from country to country. Labor is the unique factor of production that remains immobile in the country of its origin. In a blog post of April 28, 2007, Gregory Mankiw compared Ricardian theory and Heckscher-Ohlin theory and stood by the Ricardian side.[24] Mankiw argued that Ricardian theory is more realistic than the Heckscher-Ohlin theory as the latter assumes that capital does not move from country to country. Mankiw's argument contains a logical slip, for the traditional Ricardian trade theory does not admit any inputs. Shiozawa's result saves Mankiw from his slip. [25] The neoclassical Heckscher-Ohlin-Samuelson theory only assumes production factors and finished goods. It contains no concept of intermediate goods. Therefore, it is the Ricardo-Sraffa trade theory that provides theoretical bases for the topics such as outsourcing, fragmentation and intra-firm trade. Regulation of international trade Current members of the World Trade Organisation.

Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief inmercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in the United Kingdom, a belief in free trade became paramount.[citation needed] This belief became the dominant thinking among western nations since then. In the years since the Second World War, controversial multilateral treaties like theGeneral Agreement on Tariffs and Trade (GATT) and World Trade Organization have attempted to promote free tradewhile creating a globally regulated trade structure. These trade agreements have often resulted in discontent and protest with claims of unfair trade that is not beneficial to developing countries. Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe.[citation needed] The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australiaand Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to

negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation.[citation needed] The latter looks at the transaction cost associated with meeting trade and customsprocedures. Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism.[citation needed]This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services. During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression. Many economists have attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe seriously deepened the depression. The regulation of international trade is done through the World Trade Organization at the global level, and through several other regional arrangements such as MERCOSUR in South America, the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, and the European Union between 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely because of opposition from the populations of Latin American nations. Similar agreements such as the Multilateral Agreement on Investment (MAI) have also failed in recent years. [edit]Risk in international trade

Companies doing business across international borders face many of the same risks as would normally be evident in strictly domestic transactions. For example,

Buyer insolvency (purchaser cannot pay); Non-acceptance (buyer rejects goods as different from the agreed upon specifications); Credit risk (allowing the buyer to take possession of goods prior to payment); Regulatory risk (e.g., a change in rules that prevents the transaction); Intervention (governmental action to prevent a transaction being completed); Political risk (change in leadership interfering with transactions or prices); and War, piracy and civil unrest or turmoil; Natural catastrophes, freak weather and other uncontrollable and unpredictable events,

In addition, international trade also faces the risk of unfavorable exchange rate movements (and, the potential benefit of favorable movements).

REGIONAL ARRANGEMENTS AND WTO RULES When countries join regional trading groups, they provide preferences to one another. In the EU, for example, German producers can export duty-free to France, whereas U.S. or Japanese exporters still have to pay duties on products shipped to France. In this way German producers become preferred over U.S. or Japanese suppliers, because a customs union represents a departure from MFN treatment. Nevertheless, countries entering a customs union or free-trade association are not

in violation of their commitments under the World Trade Organization; just as they were permitted under GATT, customs unions and free-trade associations are still permitted through the WTO. The development of GATT trading rules offers insight into consequences of regional agreements. GATT article XXIV allowed countries to grant special treatment to one another by establishing a customs union or free-trade association, provided that (1) duties and other trade restrictions would be eliminated on substantially all the trade among the participants, (2) the elimination of internal barriers occurred within a reasonable length of time (commonly within 10 years), and (3) duties and other barriers to imports from nonmember countries would not on the whole be higher or more restrictive than those preceding the establishment of the customs union or free-trade association. The third condition was explicitly aimed at protecting the rights of outside countries. The first condition disapproved partial preferential arrangements covering only some products, while accepting broad arrangements covering (substantially) all products. It was supported on the ground that large, unrestricted marketsmost notably, that of the United Statesprovide substantial benefits. Such benefits should also be available to others. For example, when the GATT articles were being drafted, consideration was being given to an integration of the nations of western Europe. Shortly after article XXIV was written, it received substantial support in the classic study by Jacob Viner, The Customs Union Issue (1950). Viner, a Canadian-born U.S. economist, saw efficiency as the main gain from international trade, since trade encourages production in a less-costly location (see comparative advantage). He contended that a customs union works to increase efficiency in one way but decreases it in another. To explain, Viner drew a distinction between two forces at work when a customs union is established. As two (or more) countries cut tariffs on each others products, new trade is created. Some goods that were previously bought from domestic producers are now bought from lower-cost producers in the trading partner nation, whose goods now come in duty-free, which improves efficiency. When, however, a country removes tariffs on its partners goods but not on the goods of outside countries, the partner has preferred access. As a result, some purchases are switchedgoods are bought from the partner nation rather than from the world at large. Such trade diversion reduces efficiency; purchases are switched from the efficient outside country to the lessefficient partner nation. A customs union (or free-trade area) may be predominantly trade-creating, which is desirable, or it may be predominantly trade-diverting, which is undesirable. Viners book thus introduced a skeptical note into the discussion of customs unions, which had previously been given broad approval. Viners work also supported the distinctions made in article XXIV of GATT. Clearly, if barriers on imports from nonmember countries are kept down, then trade diversion is less likely. Furthermore, the provision to disapprove partial preferential arrangements covering only some products, while accepting broad arrangements covering virtually all products, found support within Viners framework. Because of the political dynamics of trade negotiations, partial preferential arrangements generally cause more trade diversion than trade creation. This can be illustrated in a hypothetical situation in which countries (say, France and Germany) are permitted to get together to make whatever preferential agreements they wish. A natural way for France to open negotiations would be to say to Germany, Well cut tariffs on your automobiles and buy from you rather than Japan if you will cut tariffs on our sugar and buy from us

rather than from the Caribbean nations. In other words, negotiators tend to pick and choose those items previously imported from outside countries; they tend to cut tariffs where trade diversion is greatest. By requiring a comprehensive approach, article XXIV ensured that trade-creating tariff cuts would be made too.

comparative-advantage analysis The British school of classical economics began in no small measure as a reaction against the inconsistencies of mercantilist thought. Adam Smith was the 18th-century founder of this school; as mentioned above, his famous work, The Wealth of Nations (1776), is in part an antimercantilist tract. In the book, Smith emphasized the importance of specialization as a source of increased output, and he treated international trade as a particular instance of specialization: in a world where productive resources are scarce and human wants cannot be completely satisfied, each nation should specialize in the production of goods it is particularly well equipped to produce; it should export part of this production, taking in exchange other goods that it cannot so readily turn out. Smith did not expand these ideas at much length, but another classical economist, David Ricardo, developed them into the principle ofcomparative advantage, a principle still to be found, much as Ricardo spelled it out, in contemporary textbooks on international trade. SIMPLIFIED THEORY OF COMPARATIVE ADVANTAGE For clarity of exposition, the theory of comparative advantage is usually first outlined as though only two countries and only two commodities were involved, although the principles are by no means limited to such cases. Again for clarity, the cost of production is usually measured only in terms of labour time and effort; the cost of a unit of cloth, for example, might be given as two hours of work. The two countries will be called A and B; and the two commodities produced, wine and cloth. The labour time required to produce a unit of either commodity in either country is as follows: cost of production (labour time) country A wine (1 unit) 1 hour cloth (1 unit) 2 hours country B 2 hours 6 hours

As compared with country A, country B is productively inefficient. Its workers need more time to turn out a unit of wine or a unit of cloth. This relative inefficiency may result from differences in climate, in worker training or skill, in the amount of available tools and equipment, or from numerous other reasons. Ricardo took it for granted that such differences do exist, and he was not concerned with their origins. Country A is said to have an absolute advantage in the production of both wine and cloth because it is more efficient in the production of both goods. Accordingly, As absolute advantage seemingly invites the conclusion that country B could not possibly compete with country A, and indeed that if trade were to be opened up between them, country B would be competitively overwhelmed. Ricardo, who focused chiefly on labour costs, insisted that this conclusion is false. The critical factor is that country Bs disadvantage is less pronounced in wine production, in which its workers require only twice as much time for a single unit as do the workers in A, than it is in cloth production, in which the required time is three times as great. This

means, Ricardo pointed out, that country B will have a comparative advantage in wine production. Both countries will profit, in terms of the real income they enjoy, if country B specializes in wine production, exporting part of its output to country A, and if country A specializes in cloth production, exporting part of its output to country B. Paradoxical though it may seem, it is preferable for country A to leave wine production to country B, despite the fact that As workers can produce wine of equal quality in half the time that Bs workers can do so. The incentive to export and to import can be explained in price terms. In country A (before international trade), the price of cloth ought to be twice that of wine, since a unit of cloth requires twice as much labour effort. If this price ratio is not satisfied, one of the two commodities will be overpriced and the other underpriced. Labour will then move out of theunderpriced occupation and into the other, until the resulting shortage of the underpriced commodity drives up its price. In country B (again, before trade), a cloth unit should cost three times as much as a wine unit, since a unit of cloth requires three times as much labour effort. Hence, a typical before-trade price relationship, matching the underlying real cost ratio in each country, might be as follows: country A country B Price of wine per unit $ 5 Price of cloth per unit $10 1 3

The absolute levels of price do not matter. All that is necessary is that in each country the ratio of the two prices should match the labourcost ratio. As soon as the opportunity for exchange between the two countries is opened up, the difference between the winecloth price ratio in country A (namely, 5:10, or 1:2) and that in country B (which is 1:3) provides the opportunity of a trading profit. Cloth will begin to move from A to B, and wine from B to A. As an illustration, a trader in A, starting with an initial investment of $10, would buy a unit of cloth, sell it in B for 3, buy 3 units of Bs wine with the proceeds, and sell this in A for $15. (This example assumes, for simplicity, that costs of transporting goods are negligible or zero. The introduction of transport costs complicates the analysis somewhat, but it does not change the conclusions, unless these costs are so high as to make trade impossible.) So long as the ratio of prices in country A differs from that in country B, the flow of goods between the two countries will steadily increase as traders become increasingly aware of the profit to be obtained by moving goods between the two countries. Prices, however, will be affected by these changing flows of goods. The wine price in country A, for example, can be expected to fall as larger and larger supplies of imported wine become available. Thus As winecloth price ratio of 1:2 will fall. For comparable reasons, Bs price ratio of 1:3 will rise. When the two ratios meet, at some intermediate level (in the example earlier, at 1:21/2), the flow of goods will stabilize. AMPLIFICATION OF THE THEORY At a later stage in the history of comparative-advantage theory, English philosopher and political economist John Stuart Mill showed that the determination of the exact after-trade price ratio was a supply-and-demand problem. At each possible intermediate ratio (within the range of 1:2 and 1:3), country A would want to import a particular quantity of wine and export a particular quantity of cloth. At that same possible ratio, country B would also wish to import and export particular amounts of

cloth and of wine. For any intermediate ratio taken at random, however, As export-import quantities are unlikely to match those of B. Ordinarily, there will be just one intermediate ratio at which the quantities correspond; that is the final trading ratio at which quantities exchanged will stabilize. Indeed, once they have stabilized, there is no further profit in exchanging goods. Even with such profits eliminated, however, there is no reason why A producers should want to stop selling part of their cloth in B, since the return there is as good as that obtained from domestic sales. Furthermore, any falloff in the amounts exported and imported would reintroduce profit opportunities. In this simple example, based on labour costs, the result is complete (and unrealistic) specialization: country As entirelabour force will move to cloth production and country Bs to wine production. More elaborate comparative-advantage models recognize production costs other than labour (that is, the costs of land and of capital). In such models, part of country As wine industry may survive and compete effectively against imports, as may also part of Bs cloth industry. The models can be expanded in other waysfor example, by involving more than two countries or products, by adding transport costs, or by accommodating a number of other variables such as labour conditions and product quality. The essential conclusions, however, come from the elementary model used above, so that this model, despite its simplicity, still provides a workable outline of the theory. (It should be noted that even the most elaborate comparative-advantage models continue to rely on certain simplifying assumptions without which the basic conclusions do not necessarily hold. These assumptions are discussed below.) As noted earlier, the effect of this analysis is to correct any false first impression that low-productivity countries are at a hopeless disadvantage in trading with high-productivity ones. The impression is false, that is, if one assumes, as comparativeadvantage theory does, that international trade is an exchange of goods between countries. It is pointless for country A to sell goods to country B, whatever its labour-cost advantages, if there is nothing that it can profitably take back in exchange for its sales. With one exception, there will always be at leastone commodity that a low-productivity country such as B can successfully export. Country B must of course pay a price for its low productivity, as compared with A; but that price is a lower per capita domestic income and not a disadvantage in international trading. For trading purposes, absolute productivity levels are unimportant; country B will always find one or more commodities in which it enjoys a comparative advantage (that is, a commodity in the production of which its absolute disadvantage is least). The one exception is that case in which productivity ratios, and consequently pretrade price ratios, happen to match one another in two countries. This would have been the case had country B required four labour hours (instead of six) to produce a unit of cloth. In such a circumstance, there would be no incentive for either country to engage in trade, nor would there be any gain from trading. In a two-commodity example such as that employed, it might not be unusual to find matching productivity and price ratios. But as soon as one moves on to cases of three and more commodities, the statistical probability of encountering precisely equal ratios becomes very small indeed. The major purpose of the theory of comparative advantage is to illustrate the gains from international trade. Each country benefits by specializing in those occupations in which it is relatively efficient; each should export part of that production and take, in exchange, those goods in whose production it is, for whatever reason, at a comparative disadvantage. The theory of

comparative advantage thus provides a strong argument for free tradeand indeed for more of a laissez-faire attitude with respect to trade. Based on this uncomplicated example, the supporting argument is simple: specialization and free exchange among nations yield higher real income for the participants. The fact that a country will enjoy higher real income as a consequence of the opening up of trade does not mean, of course, that every family or individual within the country will share in that benefit. Producer groups affected by import competition obviously will suffer, to at least some degree. Individuals are at risk of losing their jobs if the items they make can be produced more cheaply elsewhere. Comparative-advantage theorists concede that free trade would affect the relative income position of such groupsand perhaps even their absolute income level. But they insist that the special interests of these groups clash with the total national interest, and the most that comparative-advantage proponents are usually willing to concede is the possible need for temporary protection against import competition (i.e., to allow those who lose their jobs to international competition to find new occupations). Nations do, of course, maintain tariffs and other barriers to imports. For discussion of the reasons for this seeming clash between actual policies and the lessons of the theory of comparative advantage, see State interference in international trade.