International economics · A module in eight lessons
Theories of international trade, from mercantilism to Krugman
Why do countries trade, what do they gain, and who inside each country wins or loses? Economists have given three answers in four hundred years. This module takes them in order, one short lesson at a time, with a diagram you can move for every model and 149 past-paper questions to finish on.
Start at the beginning, or check where you are.Eight lessons, about 5 hours in all. Each one opens with a real exam question, builds the idea with a diagram you can move, and ends with that question solved and a set of past papers.
The path
Three answers to one question
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- 1600s to 1850sClassical
Because countries differ in how productive their labour is.
- 1Why countries trade: mercantilism and absolute advantageWhat the mercantilists believed and why Hume and Smith disagreed, absolute advantage, and who gains and who loses when one market opens to the world price.30 min · 15 past questions
- 2Comparative advantage: the Ricardian modelOpportunity cost, reading any labour table in seconds, why trade pays even a country that is worse at everything, the band the terms of trade must fall in, and wages.45 min · 46 past questions
- 3Terms of trade and offer curvesMill's reciprocal demand, Marshall's offer curves, Haberler's opportunity cost, increasing costs, the gains from trade, and the different terms of trade.40 min · 23 past questions
- 1919 to 1960sFactor endowments
Because countries own different amounts of labour, capital and land.
- 4The Heckscher–Ohlin modelFactor abundance and factor intensity, the assumptions, the Edgeworth box and the frontier it gives, and the theorem: export what uses your abundant factor.45 min · 19 past questions
- 5Stolper–Samuelson, Rybczynski and factor price equalisationWho gains from trade inside a country, why factor prices move more than goods prices, what more of one factor does to output, and the specific-factors model.45 min · 20 past questions
- 6Testing the theory: the Leontief paradoxLeontief's 1953 test of Heckscher–Ohlin on American trade, why the result looked backwards, and the explanations: skills, natural resources, tastes and factor-intensity reversal.20 min · 3 past questions
- 1950 onwardsAfter Heckscher–Ohlin
Because growth, technology and economies of scale create trade even between similar countries.
- 7Growth and trade: immiserising growth and Prebisch–SingerHow growth moves the terms of trade, when a country can grow and end up worse off, the Prebisch–Singer thesis, and Dutch disease.30 min · 8 past questions
- 8New trade theory: scale, variety and intra-industry tradeWhy similar countries trade similar goods: Krugman's economies of scale and variety, the Grubel–Lloyd index, the product cycle, the technology gap, Linder and the gravity model.40 min · 15 past questions
Where to start
A two-minute check
One question from each lesson. Your first wrong answer tells you where to begin; get them all and you can go straight to the cheat sheet.
Question 1 of 8
The mercantilists measured a nation's wealth by
Revise
Cheat sheet: every theory on one screen
What each theory says, who gave it and when, and the trap examiners set on it. The dates matter: UGC NET and CUET often ask you to put theories in order.
MercantilismMun, 1600s
Why tradeTrade is a contest for gold
PredictsPush exports, restrict imports
The trapA zero-sum view: one country's gain is another's loss. Hume showed a surplus can't last.
Absolute advantageSmith, 1776
Why tradeEach country is better at something
PredictsExport what you make with less labour
The trapCan't explain trade when one country is better at everything.
Comparative advantageRicardo, 1817
Why tradeLabour productivity differs relatively
PredictsExport the good with the lower opportunity cost
The trapCompare ratios, not absolute costs. Equal ratios mean no trade.
Reciprocal demandMill, 1848; Marshall's offer curves
Why tradeDemand on both sides sets the price
PredictsTerms of trade between the two autarky prices
The trapThe country with the stronger demand for the other's good gets the worse terms.
Opportunity costHaberler, 1930
Why tradeSame as Ricardo, without the labour theory
PredictsComplete specialisation with constant costs, incomplete with increasing costs
The trapIncreasing costs mean a curved PPF and no complete specialisation.
Heckscher–OhlinHeckscher 1919, Ohlin 1933
Why tradeFactor endowments differ
PredictsExport the good that uses your abundant factor intensively
The trapAbundance is relative, and technology and tastes are assumed the same.
Stolper–Samuelson1941
Why tradeA good's price rises
PredictsIts intensive factor gains in real terms; the other loses
The trapReal, not just nominal. Factor prices move more than goods prices.
Factor price equalisationSamuelson, 1948
Why tradeTrade in goods substitutes for moving factors
PredictsWages and rents equalise across countries
The trapNeeds incomplete specialisation. Factors are immobile, not mobile.
Rybczynski1955
Why tradeOne factor grows, prices fixed
PredictsOutput of the good using it rises, the other falls absolutely
The trapAbsolutely, not just relatively.
Leontief paradox1953
Why tradeA test of Heckscher–Ohlin
PredictsUS exports were labour-intensive
The trapThe paradox is that the US was thought capital-abundant.
Immiserising growthBhagwati, 1958
Why tradeExport-led growth floods the world market
PredictsTerms of trade can fall so far that welfare falls
The trapNeeds export-biased growth, a big exporter and inelastic foreign demand.
Prebisch–Singer1950
Why tradeDemand for primary goods grows slowly
PredictsPrimary exporters' terms of trade decline
The trapIt is about the long run, the secular trend.
Product cycle, technology gapVernon 1966, Posner 1961
Why tradeNew goods start where they are invented
PredictsThe innovator exports, then imitators take over
The trapStage IV: imitators undersell the innovator in third markets.
New trade theoryKrugman, 1979
Why tradeEconomies of scale and love of variety
PredictsSimilar countries trade similar goods (intra-industry trade)
The trapGains come from variety and lower costs, not from differences.
Drill
Who said what?
Twenty ideas, one at a time. Pick the economist; the year and the source appear when you answer.
1 of 20Score 0
Growth can make a country worse off through the terms of trade
Real questions
Practise across the module
JNU49
Hyderabad47
CUET-PG32
UGC NET20
Delhi School3
Questions placed in this module, by exam.
JNU sets the numerical ones: labour tables, terms-of-trade bands, and the theorems applied to a tariff. Hyderabad and CUET ask definitions and who-said-what. UGC NET likes matching lists and putting theories in order. Ricardo alone accounts for almost a third of the questions.
Foundation
Who said what, definitions and one-step problems. Most CUET, UGC NET and Hyderabad questions sit here.
46 questionsPractise →
Standard
Labour tables, terms-of-trade bands, the theorems applied, and statement and matching questions, up to JNU level.
103 questionsPractise →
These are questions from the TestStop bank. A free account answers 10 a day, each with its worked solution; All-Access opens every set with no daily limit.
Quick answers
Frequently asked questions
What are the main theories of international trade?
In order: mercantilism, Adam Smith's absolute advantage (1776), Ricardo's comparative advantage (1817), Mill's reciprocal demand and Marshall's offer curves, Haberler's opportunity cost (1930), the Heckscher–Ohlin factor endowment theory (1919, 1933) with its theorems (Stolper–Samuelson, factor price equalisation, Rybczynski), and the newer theories: the product cycle, the technology gap, Linder's overlapping demand and Krugman's new trade theory based on economies of scale.
What is the difference between classical and modern theories of international trade?
The classical theory (Smith and Ricardo) explains trade by differences in labour productivity, with labour as the only factor. The modern theory (Heckscher–Ohlin) assumes the same technology everywhere and explains trade by differences in factor endowments: a country exports goods that use its abundant factor intensively.
What is the difference between absolute and comparative advantage?
Absolute advantage means producing a good with less labour than another country. Comparative advantage means producing it at a lower opportunity cost, that is, giving up less of the other good. A country can have an absolute advantage in both goods but a comparative advantage in only one, and trade still benefits both sides.
What does the Heckscher–Ohlin theorem state?
A country exports the good that uses its relatively abundant factor intensively and imports the good that uses its relatively scarce factor intensively. It assumes two countries, two goods and two factors, identical technology and tastes, constant returns to scale, perfect competition and no factor-intensity reversal.
What is the Leontief paradox?
In 1953 Wassily Leontief found that US exports were less capital-intensive than the goods the US imported, although the US was the most capital-abundant country in the world. Heckscher–Ohlin predicted the opposite. Explanations include the skill of American labour, natural resources, demand patterns and factor-intensity reversal.
What is new trade theory?
Theory developed by Paul Krugman and others from the late 1970s. Firms face economies of scale and consumers like variety, so even identical countries gain from trading different varieties of the same product. It explains intra-industry trade between similar rich countries, which Ricardo and Heckscher–Ohlin cannot.
Read next
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