The models of Chapter 3, based on technology- and factor endowment differences can explain inter-industry trade but not intra-industry trade – the simultaneous import and export of similar types of goods and services – which is empirically important, especially between rich countries. Competitive pressure by foreign firms and strategic interaction may entice companies to engage in mutual trade flows of homogeneous products, leading to lower mark-ups, lower prices, larger volumes, and welfare gains for consumers. Firms can also engage in trading similar for better use of scale economies, lower prices and access to a larger number of varieties. The international business literature focuses on multinational firms, investigating why some multinationals can do better than others by creating a competitive advantage. In a setting of intra-industry trade, international business (dealing with firm-level competition) thus meets international economics (focusing on country-level trade).

This chapter describes broad regional and temporal trends in the evolution of international trade and international factor flows between 1700 and 1870, including key differences in trade costs across space and time. We find trade links in western Europe and the European colonies of North America intensified at the same time these regions experienced the initial Industrial Revolution and the spread of industrialization, which led to sustained economic growth. At the same time, global differences in specialization and income emerged. To understand the contribution of global market forces as well as colonialism to these differences, the chapter lays out theoretical reasons for links between trade and economic growth and examines related historical arguments and evidence. We conclude that trade contributed to global divergence, but the magnitude and mechanisms through which trade affected global welfare lies not so much in the direct impact of trade and specialization as in multiplier effects emerging from the interactions of trade with other factors that affect economic development.

This chapter provides an introduction to comparative advantage based on the Heckscher–Ohlin model of international trade. The Heckscher–Ohlin model explains comparative advantage in terms of difference in factor endowments between the countries of the world. The chapter demonstrates the principle of mutual gains from trade. An appendix outlines the gravity model.

This chapter provides an introduction to international trade using the supply and demand framework and the concept of absolute advantage. It introduces the idea of mutual gains from trade. An appendix reviews supply and demand.

This chapter provides an introduction to comparative advantage based on the Ricardian model of international trade. The Ricardian model explains comparative advantage in terms of difference in technology between the countries of the world. The chapter demonstrates the principle of mutual gains from trade. An appendix looks at the production possibilities frontier.