International Trade in the Real World and the Theoretical Issues

The pure theory of international trade attempts to determine the causes of trade, that is, to determine why one country, for example, imports machinery and exports textiles. It then attempts to analyse the consequences of international trade. First, as trade takes place, a country produces more of the exportables and less of the importables. This transformation of production, in conjunction with international exchange, will change factor prices, commodity prices, income, and income distribution, and hence, consumption. Second, as trade takes place without any impediments of tariffs or quotas, the question is raised regarding whether a country obtains gains from trade, or for that matter, whether the global welfare of the trading world increases. This question raises further issues related to the terms of trade, tariffs and subsidies within a static framework of given endowments of factors of production, and to economic growth in a dynamic framework.