ABSTRACT
This chapter presents the standard two-commodity, two-factor barter model of international trade. Since the pure theory of international trade makes heavy use of several concepts of micro-economics, a brief treatment of the more frequently used micro-economics concepts is also provided. If the economist is interested in comparing the welfare effects of a lower tariff with a higher tariff, then a utility function is needed. Economists do like making policy judgements and policy recommendations, and hence, in spite of difficulties associated with the aggregate utility function. The closed economy model can easily be derived as a subset of the open economy model. Many results in trade theory are either proved or illustrated with the help of the production possibility curve. In an incompletely specialised two-factor, two-commodity economy an increase in the price of any commodity raises the real reward of the factor used intensively in the production of the commodity of which the price has increased.
