This chapter examines the effects of trade on income distribution. Combining these insights with the basic view of trade offered in Chapters 2, 3, and 4, we can summarize by answering the four basic questions about trade introduced at the start of Chapter 2.

1. Why do countries trade? Supply and demand conditions differ between countries because production conditions and consumer tastes differ. The main theories emphasize differences in production conditions rather than in tastes. Ricardo argued that trade is profitable because countries have different comparative advantages in producing different goods. His examples stressed differences in resource productivities. The Heckscher-Ohlin theory agrees that comparative advantages in production are the basis for trade, but H-O explains comparative advantage in terms of underlying differences in factor endowments. Each country tends to export those goods that intensively use its relatively abundant factors of production. The evidence is that the Heckscher-Ohlin theory explains a good part of the world's actual trade patterns reasonably well, but that some important aspects of trade patterns do not square easily with H-O.
2. How does trade affect production and consumption in each country? In the country importing a good, it will raise consumption and lower production of that good. In the exporting country, it will raise production of that good, but in the general case we cannot say for sure what happens to the quantity consumed of that good. With the exception of the latter conclusion, these answers are unchanged since Chapter 2.
3. Which country gains from trade? Both countries gain. Trade makes every nation better off in the net national sense defined in Chapter 2. Each country's net national gains are proportional to the change in its price from its no-trade value, so the country whose prices are disrupted more by trade gains more. (Later chapters will show how an already-trading nation can be made worse off by trading more, but some trade is better than no trade at all.)
4. Within each country, who are the gainers and losers from opening trade? This chapter has concentrated on this fourth question. Its answers go well beyond those summarized at the end of Chapter 2.

In the short run, with factors unable to move much between sectors, the gainers and losers are defined by the product sector, not by what factors of production the people are selling. The gainers are those who consume imported goods and produce exportable goods. Those who lose are the producers of import-competing goods and consumers of exportable goods. So far, the answer remains close to the answer given at the end of Chapter 2.

In the long run, when factors can move between sectors and the economy achieves full employment, the division between gainers and losers looks different. The Stolper-Samuelson theorem shows that

• If you make your living selling a factor that is more abundant in your country than it is in other countries, you gain from trade (by receiving a higher real income), regardless of what sector you work in or what goods you consume. Examples are scientists and grain-area landowners in the United States, and less-skilled laborers in China.

• If you make your living selling a factor that is relatively scarce in your country, you lose from trade (by receiving a lower real income), regardless of what sector you work in or what goods you consume. Examples are less-skilled laborers in the United States, and scientists and grain-area landowners in China.

A corollary of these long-run effects on different groups' fortunes is that trade can reduce international differences in how well a given factor of production is paid. A factor of production (for instance, less-skilled labor) tends to lose its high reward in countries where it was scarce before trade and to gain in countries where it was abundant before trade. Under certain conditions the factor-price equalization theorem holds: Free trade will equalize a factor's rate of pay in all countries, even if the factor itself is not free to move between countries. Those conditions for perfect equalization are not often met in the real world, but there is real-world evidence that opening trade tends to make factor prices less unequal between countries.