If two countries have the same relative prices of commodities in autarky, and trade is allowed to open up, there is a general equilibrium with zero imports and exports. In the case of a unique equilibrium, therefore, comparative advantage–meaning differences in autarky relative prices–is the basis for trade. However, this is a trivial point, and the theory of comparative advantage goes beyond it to postulate a systematic relationship between the pattern of comparative advantage and the commodity composition of trade. In the first part of this chapter, we examine whether such a systematic relationship exists.

The hypothesis that the pattern of trade reflects comparative advantage is meaningful in the sense that we could test it by computing autarky prices for the countries and comparing them with the observed trade pattern. However, this is hardly in the realm of practical empirical work. Propositions relating trade patterns to easily observable variables are, therefore, much more attractive. That is why the factor abundance hypothesis merits careful consideration: it is the only hypothesis regarding the commodity composition of trade that requires only limited information about demand patterns and production technologies. We therefore look closely at this hypothesis. First we look at the relationship between factor abundance and autarky relative prices. Then we examine some properties of a free trade equilibrium in which the countries differ only in their factor endowments. Under this heading we here study the effect of trade on international factor price differences, and the question of the extent of production specialization induced by trade.