Summary: Early Answers to the Four Trade Questions

Extending the familiar demand-supply framework to international trade has given us useful preliminary answers to the four basic questions about international trade. The contrast between no trade and free trade offers these conclusions:

1. Why do countries trade? Demand and supply conditions differ between countries, so prices differ between countries if there is no international trade. Trade begins as someone conducts arbitrage to earn profits from the price difference between previously separated markets. A product will be exported from countries where its price was lower without trade to countries where its price was higher.
2. How does trade affect production and consumption in each country? The move from no trade to a free-trade equilibrium changes the product price from its notrade value to the free-trade equilibrium international price or world price. The price change in each country results in changes in quantities consumed and produced. In the country importing the product, trade raises the quantity consumed and lowers the quantity produced of that product. In the exporting country, trade raises the quantity produced and lowers the quantity consumed of the product.
3. Which country gains from trade? If we use the one-dollar, one vote metric, then both do. Each country's net national gains from trade are proportional to the change in its price that occurs in the shift from no trade to free trade. The country whose prices are disrupted more by trade gains more.
4. Within each country, who are the gainers and losers from opening trade? The gainers are the consumers of imported products and the producers of exportable products. Those who lose are the producers of import-competing products and the consumers of exportable products.