International Trade Theory and Policy
by Steven M. Suranovic

Trade 30-3

Example of a Trade Pattern

Suppose after some discussion Farmer Smith and Jones agree to a trade of 6 apples for 6 oranges (see Figure). The terms of trade is 6 apples/6 oranges or 1 apple/orange. After trade, Farmer Smith will have 4 oranges and 6 apples to consume, while Farmer Jones will have 6 oranges and 4 apples to consume. As long as the trade is voluntary, it must hold that both farmers expect to be better-off after trade since they are free not to trade. Thus voluntary trade must be mutually beneficial.

Sometimes people talk about trade as if it were adversarial; one side competing against the other. In this context, one might believe that trade would generate a winner and a loser as if trade were a contest. However, a pure exchange model demonstrates that trade is not a zero-sum game. When two individuals make a voluntary exchange, they will both benefit.

Sometimes the pure exchange model is placed in the context of two trading countries. Suppose instead of Farmer Smith and Jones, we imagine the US and Canada as the two "individuals" who trade with each other. If two countries make voluntary exchanges, and if the countries can opt not to trade if they so desire, then trade must be beneficial for both countries. It is incorrect to assert, however, that everyone in each country will benefit from free trade if the country is composed of many individuals (as they usually are!). Although the national welfare effect will be positive, in a country composed of many individuals, a redistribution of income generating winners and losers from trade is very likely. This will be shown in later models.

International Trade Theory and Policy - Chapter 30-3: Last Updated on 8/20/03