ABSTRACT
This chapter develops the analysis of Chapter 2 along neo-classical lines. First, it relaxes the assumption of constant costs, showing how international trade under increasing costs will rarely involve complete specialisation. Second, it develops a rationale for increasing costs and for differences in comparative productivity in terms of countries’ differing endowments of factors of production. This is the Heckscher-Ohlin model of trade, and it is examined in some detail, both in itself and in its implications for factor rewards and patterns of output. The analysis is continued in the next chapter, which deals with a particular variant of the model and with empirical tests of Heckscher-Ohlin.
