ABSTRACT
This chapter introduces the economic foundations of international trade, exploring why countries trade, what determines trade patterns, and how trade affects welfare. We begin with Ricardo’s theory of comparative advantage, showing how specialization according to opportunity costs creates mutual gains. We then present a general equilibrium model with perfect competition and specific factors, highlighting how trade changes relative prices, reallocates resources, and generates winners and losers within countries. A third model—monopolistic competition with differentiated products—explains intra-industry trade and gains from variety and economies of scale. The chapter also analyzes trade policy tools such as tariffs, quotas, and subsidies, and uses partial equilibrium tools to assess their welfare effects. Empirical evidence supports trade’s contribution to income growth, but also reveals distributional consequences and strategic considerations. Topics include globalization, gravity models, and trade and inequality.
