ABSTRACT
This chapter outlines the basic principles of trade, including comparative advantage, factor proportions theory, and trade with increasing returns first in the international case and then in the regional case. Factor proportions theory, which emerged in the 1930s, explains both the causes and consequences of comparative advantage. A country has a comparative advantage for the purposes of trade in those commodities that its industry produces most cost-effectively relative to other commodities. The new trade theory introduces another explanation for why countries (and regions) trade: because there are economies of scale in specialization. The theory also places much emphasis on the role of chance in determining the pattern of specialization. Trade theory narrows the economic developer’s attention to tradable commodities, both goods and services; the larger group of commodities that neither are exchanged nor minimally traded may be ignored. Trade theory would encourage local economic developers to analyze closely an export promotion strategy.
