ABSTRACT
In this chapter we introduce the somewhat more formal framework developed by economists who followed the early classical writers, but we retain our focus on the same basic question: why do nations trade? We extend the analysis of Chapter 2 in two important ways: we examine demand conditions and consumer preferences more carefully; and we consider an economy’s production capabilities in greater detail. By combining these two perspectives, we can better explain what determines the volume of goods and services traded and the international prices established.
