ABSTRACT
This chapter deals with the effect of international trade on the welfare of the citizens of the trading countries. International trade takes place because the relative pretrade equilibrium commodity prices differ between countries. With the opening up of trade, these relative commodity prices tend, in the absence of transportation costs, toward complete equality. If international trade actually increases national income, the absolute income of workers might still increase even though their relative income falls: a smaller share from a large pie may very well be bigger than a larger share from a small pie. However, with the introduction of trade, all prices change, which presents a dilemma in terms of absolute income. Several simple cases are discussed in which international trade improves the welfare of all individuals of all trading countries or—in the limiting case where the posttrade equilibrium prices are equal to the pretrade equilibrium prices of an economy—it does not hurt anybody.
