THE ISSUES

Opportunities for international trade arise because supply and demand conditions differ from country to country. That was the main point made in Chapter 2. In that chapter, however, we focused mainly on supply conditions, and we will continue to do so in this chapter and the next. These chapters study three issues:

• Why supply conditions differ from country to country, leading to price differences between countries.

• How they are reflected in the pattern of trade.

• How the trade pattern and terms of trade affect internal conditions in each country.

The model presented in this chapter concentrates on differences in technology as sources of differences in supply conditions. It is based on the example used by David Ricardo to prove the law of comparative advantage. The model developed in the next chapter concentrates on differences in factor supplies. It is an outgrowth of the model used by Eli Heckscher and Bertil Ohlin, two Swedish economists, to demonstrate the influence of factor endowments on international specialization.

SOURCES OF COMPARATIVE ADVANTAGE

The shape and position of a country's transformation curve depend on its factor supplies and the efficiency with which it uses them. In other words, they depend on its endowment of land, labor, and capital and on its technology. Differences between endowments and technologies lead to predictable differences between transformation curves.

There are large differences in national endowments, reflecting the gifts of nature and the fruits of human effort.