CHAPTER 4

 Trade benefits the factor specific to the export sector of each country but hurts the factor
specific to the import-competing sectors, with ambiguous effects on mobile factors.
 Could those who gain from trade compensate those who lose and still be better off themselves?
If so, then trade is potentially a source of gain to everyone.
 In order to show aggregate gains from trade, we need to state some basic relationships among
prices, production, and consumption
 The constraint that the value of consumption equals that of production (or, equivalently, that
imports equal exports in value) may not hold when countries can borrow from other countries
or lend to them. For now, we assume that these possibilities are not available and that the
budget constraint [equation (4-8)] therefore holds.
 The demand for labor in each sector depends on the price of output and the wage rate.
 In each sector, profit-maximizing employers will demand labor up to the point where the value
produced by an additional person-hour equals the cost of employing that hour. In the cloth
sector, for example, the value of an additional person-hour is the marginal
 The wage rate, in turn, is determined by the requirement that total labor demand (total
employment) equals total labor supply
 This insight is crucial to understanding the considerations that actually determine trade policy in
the modern world economy. Our specific factors model informs us that those who stand to lose
most from trade (at least in the short run) are the immobile factors in the import-competing
sector. In the real world, this includes not only the owners of capital but also a portion of the
labor force in those importing-competing sectors.