ABSTRACT
The modern theory of international trade is basically a long-run static theory. It postulates the existence of two homogeneous factors of production which are usually assumed to remain in fixed supply throughout. Even though modern economists take, with some justification, the rate of growth of the labor force as given exogenously by demographic factors, the same claim cannot be made for capital, because the factor capital should be understood to mean "produced means of production." A dynamic model of a simple open economy will be set up to show how the long-run equilibrium capital/labor ratio, and therefore the pattern of specialization, is determined. The economy will produce at that point where the production-possibilities frontier is tangent to the highest income contour line. Although the pattern of specialization is perfectly determined once the steady-state growth path is attained, nothing can be said about the pattern of specialization during the transitional period when the system is moving toward long-run equilibrium.
