ABSTRACT
This chapter examines the arguments supporting the free-trade doctrine in the context of major theoretical developments in the gains from trade literature. It discusses many paradoxes in modern trade theory. The classical theory of international trade was formulated primarily to provide guidance on important questions of national policy. It originated in Britain where a major issue revolved around the potential gains to England from free trade, as well as the distribution of gains from trade between England and the rest of the world. An important and growing literature has devoted attention to the more general incorporation of uncertainty into gains from trade theorizing. The chapter investigates the case of a small trading country experiencing large fluctuations in terms of trade as a result of uncertain transaction costs and/or of erratic movements in spot exchange rates.
