52.05.01 · economics / international-trade-finance

International trade and finance — comparative advantage and open-economy macro

shipped3 tiersLean: none

Anchor (Master): Krugman & Obstfeld International Economics (10e); Feenstra & Taylor International Trade (2014); Mundell 1963 Capital Mobility and Stabilization Policy

Intuition Beginner

Countries trade because they differ — in what they can produce, in what it costs them to produce it, and in what their people want to buy. Two ideas carry most of the weight.

First, comparative advantage. Even a country that is worse at producing everything gains by specialising in what it does relatively best and trading for the rest. The decisive quantity is not absolute productivity but opportunity cost: what you give up to make one good instead of another.

Second, money moves across borders. Every shipment of goods is matched by a payment, and these payments flow through the foreign-exchange market. The exchange rate is the price that balances the flows of currencies; the balance of payments is the ledger that records trade in goods, services, and assets.

Trade raises a country's total income, but it does not raise everyone's income. The industries that expand when the country opens win; the industries that compete with imports lose. Finance is the mirror image: when capital crosses borders, domestic interest rates and exchange rates move, helping borrowers and hurting savers in different measure.

Policy sits where these two truths collide. Tariffs, quotas, capital controls, and the choice between fixed and floating exchange rates are the instruments that governments use to manage the gains and losses of openness.

Visual Beginner

The standard picture shows two countries joined by a single world price. In the exporting country the domestic price rises to meet the world price and the surplus is shipped abroad; in the importing country the domestic price falls to the world price and the gap is filled by imports.

Above the world price a country exports; below it a country imports. When trade is balanced the two shaded quantity gaps match.

Worked example Beginner

The classic Ricardo example uses England and Portugal trading cloth for wine. Labour-hours needed to make one unit:

	Cloth	Wine
England	100	120
Portugal	90	80

Portugal needs fewer hours for both goods, so it has an absolute advantage in both. Yet trade still pays.

Step 1 — Opportunity cost of wine (in cloth). In England, one unit of wine costs 120 hours, which could have made $120/100 = 1.2$ units of cloth. In Portugal, one unit of wine costs 80 hours, which could have made $80/90 \approx 0.89$ units of cloth. Portugal gives up less cloth per wine, so Portugal has the comparative advantage in wine.

Step 2 — Opportunity cost of cloth (in wine). By the same arithmetic, one cloth costs $100/120 \approx 0.83$ wine in England but $90/80 = 1.125$ wine in Portugal. England has the comparative advantage in cloth.

Step 3 — Specialise and trade. England makes only cloth, Portugal makes only wine, and they trade at a rate between the two opportunity costs — say 1 cloth for 1 wine.

Step 4 — Measure the gain. In England, 120 hours make 1.2 cloth, which at 1:1 trades for 1.2 wine. Without trade those same 120 hours made only 1 wine. England gets 20 percent more wine for the same work. Portugal gets more cloth per wine than it could make at home — both sides gain from trade even though Portugal is more productive at everything.

Check your understanding Beginner

Formal definition Intermediate+

Ricardian model (two countries, two goods). Countries $i \in {H, F}$ produce goods $j \in {1, 2}$ with constant unit labour requirements $a_{ij}$ ; the labour endowment of country $i$ is $L_{i}$ . Labour is the sole factor, mobile across sectors inside a country and immobile across countries. Country $i$ 's production possibility frontier is the line segment

a_{i 1} q_{i 1} + a_{i 2} q_{i 2} \leq L_{i}, q_{ij} \geq 0,

with slope $- a_{i 1} / a_{i 2}$ , the opportunity cost of good 1 in terms of good 2. Country $H$ has a comparative advantage in good 1 iff $a_{H 1} / a_{H 2} < a_{F 1} / a_{F 2}$ .

Heckscher-Ohlin model. Two countries, two goods, two factors — capital $K$ and labour $L$ . Good 1 is capital-intensive, good 2 is labour-intensive; $H$ is capital-abundant when $K_{H} / L_{H} > K_{F} / L_{F}$ . The Heckscher-Ohlin theorem predicts that each country exports the good that uses its abundant factor intensively; factor-price equalisation states that, under identical technology and preferences and incomplete specialisation, free trade equalises the return to each factor across countries ^{[Heckscher 1919]}.

Exchange rate. Let $E$ denote the domestic price of foreign currency (units of home currency per unit of foreign). The real exchange rate is $ε = E P^{*} / P$ , where $P$ is the home price level and $P^{*}$ the foreign. The trade balance in real terms is net exports $N X (ε)$ , increasing in $ε$ (a real depreciation makes home goods cheaper abroad).

Balance of payments. The current account $C A$ (trade balance plus net investment income and transfers) plus the financial account $K A$ (net capital outflow) plus the change in official reserves satisfies the accounting identity

C A + K A + Δ R = 0,

so that a current-account deficit is matched by a capital inflow or a reserve outflow.

Mundell-Fleming (IS-LM-BP). Extending the closed-economy IS-LM model of 52.02.01 to the open economy with perfect capital mobility,

Y = C (Y - T) + I (r^{*}) + G + N X (ε), M / P = L (Y, r^{*}),

together with an uncovered-interest-parity condition $r = r^{*} + E [\dot{E} / E]$ linking the exchange rate to expected depreciation. The system pins down output $Y$ , the interest rate $r$ , and the exchange rate $E$ .

Economic theory Intermediate+

Theorem (Ricardian gains from trade). Let two countries have unit labour requirements with $a_{H 1} / a_{H 2} < a_{F 1} / a_{F 2}$ , and let preferences be monotone, continuous, and convex. For any world relative price $p \in (a_{H 1} / a_{H 2}, a_{F 1} / a_{F 2})$ , the free-trade equilibrium has $H$ specialised in good 1 and $F$ specialised in good 2, and each country attains a consumption bundle it cannot afford in autarky.

Argument. The wage in $H$ measured in good 1 is $1/ a_{H 1}$ and in good 2 is $1/ a_{H 2}$ per labour-hour. At world prices $(p, 1)$ , producing good 1 earns $p / a_{H 1}$ per hour and producing good 2 earns $1/ a_{H 2}$ per hour. Because $p > a_{H 1} / a_{H 2}$ , good 1 pays strictly more per hour, so $H$ specialises in good 1. By the symmetric inequality $p < a_{F 1} / a_{F 2}$ , $F$ specialises in good 2. At the world price the budget line through $H$ 's specialisation point has slope $- p$ , strictly flatter than $H$ 's autarky frontier of slope $- a_{H 1} / a_{H 2}$ , and passes through the full-specialisation corner; it therefore lies strictly outside the autarky frontier for every bundle $H$ consumed in autarky, so any monotone-preference consumer can afford a strictly preferred bundle. The dual argument holds for $F$ . $□$

Stolper-Samuelson theorem. In a two-good, two-factor Heckscher-Ohlin economy, an increase in the relative price of a good raises the real return to the factor used intensively in producing that good and lowers the real return to the other factor. Opening a capital-abundant country to trade raises the price of its capital-intensive export, so capital gains and labour loses in real terms — the analytical root of protectionist politics.

The macroeconomic trilemma (Mundell-Fleming). A country can attain at most two of three goals: (i) a fixed exchange rate, (ii) free international capital mobility, and (iii) an independent monetary policy aimed at domestic output and employment. Fixed rates plus perfect capital mobility force the domestic interest rate onto the world rate, neutralising monetary policy; fixed rates without capital mobility preserve policy independence at the cost of mobile capital; a floating rate with free capital mobility lets monetary policy work but allows the exchange rate to move.

Bridge. The Ricardian result builds toward the open-economy macroeconomics of 52.02.01, where the IS-LM apparatus gains an exchange rate and a balance-of-payments equation, and appears again in 52.04.01, where tariff retaliation and strategic trade policy are modelled as games between governments. The foundational reason comparative advantage generates gains is that opportunity cost — not absolute productivity — sets the terms on which specialisation pays, and this is exactly the same relative-price logic that drives Stolper-Samuelson redistribution and the Mundell-Fleming trilemma; the bridge is that every result in international economics is an equilibrium-and-relative-price argument, and the pattern generalises to the welfare and policy analysis that occupies the rest of the economics curriculum.

Exercises Intermediate+

Exercise 7 (hard, symbolic).

In the Mundell-Fleming model with perfect capital mobility, prove that an exogenous monetary expansion has no effect on output under fixed exchange rates, and explain the mechanism step by step.

Hint

Trace the LM shift, the interest-rate gap, capital flows, and the reserve defence of the peg.

Answer

Perfect capital mobility ties $r$ to $r^{*}$ . A monetary expansion shifts the LM curve rightward, which at the initial $Y$ would lower $r$ below $r^{*}$ . Domestic assets then offer a lower return than foreign assets, capital flows out, and the domestic currency depreciates. To defend the fixed peg the central bank sells foreign reserves and buys domestic currency, reducing the money supply and shifting LM back to the left. The contraction continues until $r$ returns to $r^{*}$ , at which point the money supply — and hence output — are back at their initial values. Monetary policy is therefore ineffective under fixed rates with perfect capital mobility.

Exercise 8 (hard, symbolic).

Show that the Ricardian gains from trade vanish if the world relative price equals the autarky opportunity cost of one country. Explain why the price must lie strictly between the two autarky prices for both countries to gain.

Hint

When the world price equals a country's opportunity cost, its world-price budget line coincides with its autarky frontier.

Answer

Suppose the world price $p$ equals $a_{H 1} / a_{H 2}$ , $H$ 's autarky opportunity cost of good 1. Then $H$ earns the same revenue per labour-hour in either sector and is indifferent among all production points on its frontier; its world-price budget line coincides with its autarky frontier, so trade opens no new affordable bundle and $H$ gains nothing. Symmetrically, $p$ must lie strictly below $a_{F 1} / a_{F 2}$ so that $F$ strictly prefers its specialisation good. Only for $p \in (a_{H 1} / a_{H 2}, a_{F 1} / a_{F 2})$ does each country's world-price budget line pass strictly outside its autarky frontier, giving both a strict gain.

Exercise 9 (hard, symbolic).

Derive the Heckscher-Ohlin trade pattern from factor abundance and factor intensity. State the assumptions you need and show why the capital-abundant country exports the capital-intensive good.

Hint

Use the factor-endowment ratio and the factor-intensity ranking to compare autarky relative prices.

Answer

Assume two countries $H, F$ , two goods (1 capital-intensive, 2 labour-intensive), two factors ( $K, L$ ), identical constant-returns technologies, identical homothetic preferences, and no factor-intensity reversal. With $K_{H} / L_{H} > K_{F} / L_{F}$ , the capital-abundant $H$ has a relatively abundant factor $K$ . In autarky, the relative supply of good 1 is higher in $H$ because its factor mix favours the capital-intensive good, so $H$ 's autarky relative price $p_{1} / p_{2}$ is lower than $F$ 's. Opening trade to a common world price between the two autarky prices, $H$ exports the good that is cheap at home — good 1, the capital-intensive good — and $F$ exports good 2. The Heckscher-Ohlin prediction follows: each country exports the good that uses its abundant factor intensively.

Lean formalization Intermediate+

lean_status: none. The Ricardian and Mundell-Fleming models are prose-and-equation constructs whose validation is consistency of the equilibrium reasoning and fit to data, not formal proof. The Lagrangian and convex-programming machinery that underlies the Stolper-Samuelson result is treated in 44.02.01; a full formalisation of comparative-advantage gains, factor-price equalisation, and the IS-LM-BP trilemma is an open target, not an existing Mathlib module.

Advanced results Master

The factor-endowments programme and its empirical puzzles. The Heckscher-Ohlin model predicts that trade flows reflect factor abundance. Wassily Leontief's 1953 test found that the United States — then the world's most capital-abundant economy — exported labour-intensive goods and imported capital-intensive goods, a counter-evidence result known as the Leontief paradox ^{[Heckscher 1919]}. Reconciliations emphasise human capital, technology differences, and natural-resource intensity: once skilled labour and technology are separated from raw capital, the factor-content prediction recovers much of its force, though a pure two-factor version fits the data poorly.

New trade theory and intra-industry trade. Krugman's 1979 model of monopolistic competition with increasing returns explains a fact the Ricardian and Heckscher-Ohlin frameworks cannot: most world trade is intra-industry — Germany exports cars to France and imports cars from France. With increasing returns to scale and product differentiation, countries gain from specialisation at the variety level even when their factor endowments are identical, and each consumer gains from access to a wider range of varieties. This reframes gains from trade as gains from variety and scale rather than from comparative-cost differences alone.

Strategic trade policy. Brander and Spencer (1985) showed that in an imperfectly competitive industry with above-normal (oligopoly) rents, an export subsidy can shift those rents toward the home firm at the foreign firm's expense, raising domestic welfare. This is the formal basis for strategic trade intervention and a counter to the classical free-trade presumption — though its practical force depends on information, credibility, and the risk of foreign retaliation.

Contested question: free trade versus strategic trade policy. Two positions deserve separate hearing. Position 1 (classical free trade) holds that comparative advantage plus competitive markets maximise world welfare, that tariffs create deadweight losses, and that strategic-trade arguments, while logically valid, require information governments rarely possess and invite retaliation that leaves all parties worse off. Position 2 (strategic and new trade theory) holds that under increasing returns and imperfect competition there are rents worth competing for, that infant-industry protection has historical successes, and that well-designed industrial policy can shift a country into higher-value activities. The honest synthesis is that free trade wins on aggregate welfare in competitive, constant-returns environments, while targeted intervention has theoretical and occasional empirical force where scale economies and rents are real.

Contested question: the benefits and costs of globalisation. Openness raises aggregate income through specialisation, technology transfer, and cheaper inputs, and has lifted hundreds of millions out of poverty in the trade-integration wave since 1990. The counter-position is that the distributional costs — the Stolper-Samuelson losses to import-competing workers, financial-contagion risk from open capital accounts, and reduced policy autonomy under the trilemma — are concentrated, persistent, and politically corrosive when the aggregate gains are diffused. Neither position is wrong; international economics holds them together by separating the aggregate result (gains) from the distributional result (losers) and treating compensation and adjustment policy as the legitimate subject of the discipline.

Synthesis. International economics builds toward a unified equilibrium account of real trade and financial flows, and appears again in 52.02.01 (macroeconomics) and 52.04.01 (game theory); the foundational reason the field coheres is that comparative advantage, exchange-rate determination, and the Mundell-Fleming trilemma are all relative-price-and-equilibrium arguments, this is exactly the logic that lets one trade off the classical case for free trade against the strategic-trade and globalisation-skeptic positions, the central insight is that aggregate gains coexist with distributional losses, the bridge is that openness reshapes both the real allocation of goods across borders and the financial setting of interest rates and exchange rates, and the pattern generalises from the Ricardian two-by-two model to modern heterogeneous-firm and increasing-returns trade theory; putting these together, international economics is the chapter where the closed-economy results of microeconomics and macroeconomics meet the border.

Full proof set Master

Proposition (Ricardian gains, full statement). Let two countries have unit labour requirements satisfying $a_{H 1} / a_{H 2} < a_{F 1} / a_{F 2}$ , with monotone, continuous, convex preferences and labour endowments $L_{H}, L_{F} > 0$ . For any world relative price $p \in (a_{H 1} / a_{H 2}, a_{F 1} / a_{F 2})$ , the free-trade equilibrium has $H$ fully specialised in good 1 and $F$ fully specialised in good 2, and each country attains an affordable consumption bundle strictly preferred to any autarky bundle.

Proof. (1) Specialisation. At world prices $(p, 1)$ the revenue per labour-hour in $H$ is $p / a_{H 1}$ in sector 1 and $1/ a_{H 2}$ in sector 2. Since $p > a_{H 1} / a_{H 2}$ , we have $p / a_{H 1} > 1/ a_{H 2}$ , so every hour is strictly more productive in sector 1 and $H$ sets $q_{H 2} = 0$ , $q_{H 1} = L_{H} / a_{H 1}$ . The dual inequality $p < a_{F 1} / a_{F 2}$ gives $1/ a_{F 2} > p / a_{F 1}$ , so $F$ sets $q_{F 1} = 0$ , $q_{F 2} = L_{F} / a_{F 2}$ .

(2) Budget sets strictly contain autarky. $H$ 's post-trade income at world prices is $Y_{H} = p \cdot L_{H} / a_{H 1}$ , so its affordable set is ${(c_{1}, c_{2}) : p c_{1} + c_{2} \leq Y_{H}}$ . This budget line meets the $c_{1}$ -axis at $(L_{H} / a_{H 1}, 0)$ , the full-specialisation corner, and has slope $- p$ . $H$ 's autarky frontier has slope $- a_{H 1} / a_{H 2}$ , which is steeper than $- p$ because $p > a_{H 1} / a_{H 2}$ . Hence the world-price budget line, anchored at the corner where $H$ produces only good 1, lies strictly outside the autarky frontier for every bundle involving positive good 2. Every bundle affordable in autarky remains affordable and is strictly dominated by some trade-affordable bundle; with monotone preferences $H$ strictly prefers a trade bundle. The dual argument with slope $- a_{F 1} / a_{F 2} < - p$ delivers the same conclusion for $F$ . $□$

Proposition (Monetary-policy ineffectiveness under fixed rates and perfect capital mobility). In the Mundell-Fleming model, if the nominal exchange rate is fixed and capital is perfectly mobile, an exogenous open-market monetary expansion has no effect on equilibrium output.

Proof. Perfect capital mobility imposes uncovered interest parity $r = r^{*} + E [\dot{E} / E]$ . Under a credible fixed rate the expected depreciation term is zero, so $r = r^{*}$ . A monetary expansion shifts LM rightward, placing downward pressure on $r$ at the initial income. With $r$ below $r^{*}$ , investors sell domestic assets, the currency depreciates, and the central bank — committed to the peg — must sell foreign reserves and buy domestic currency, contracting the money supply. LM shifts back leftward until $r$ returns to $r^{*}$ , at which point reserve outflow ceases, the money supply equals its pre-expansion level, and the IS-LM intersection — hence output — is unchanged. $□$

Connections Master

Macroeconomics 52.02.01. The closed-economy IS-LM model and the money market are the scaffolding that Mundell-Fleming extends with an exchange rate and a balance-of-payments equation; the fiscal and monetary multipliers of the closed economy are the baseline against which the open-economy results — and the trilemma — are stated.
Microeconomics 52.01.01. Comparative advantage is a relative-price and budget-set argument, the same constrained-optimisation logic microeconomics applies to consumer choice, deployed across countries; the Stolper-Samuelson theorem is a direct application of general-equilibrium welfare and distribution analysis to international prices.
Game theory 52.04.01. Tariff retaliation, strategic trade policy in the Brander-Spencer sense, and competitive currency devaluations are strategic interactions among governments, modelled as games in which the non-cooperative Nash equilibrium is typically inefficient relative to the free-trade cooperative outcome.

Historical & philosophical context Master

David Ricardo's On the Principles of Political Economy and Taxation (1817) introduced comparative advantage in Chapter 7 through the England–Portugal cloth-and-wine example that remains the canonical teaching device ^{[Ricardo 1817]}. Ricardo's contribution overturned the mercantilist intuition that a country should export only what it makes most cheaply: even a nation less productive at everything gains by specialising where its relative cost is lowest, and the gains are mutual.

The factor-endowments theory reframed the source of comparative advantage from differences in labour productivity to differences in factor abundance. Eli Heckscher's 1919 essay and Bertil Ohlin's Interregional and International Trade (1933) argued that countries export goods that use their abundant factors intensively; the Stolper-Samuelson theorem of 1941 supplied the distributional corollary, explaining why the scarce factor opposes openness — the analytical root of protectionist politics that persists to the present ^{[Heckscher 1919]}.

On the finance side, Robert Mundell's 1963 paper Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates built the open-economy IS-LM model and the policy trilemma that bears his name, with parallel work by Marcus Fleming giving the Mundell-Fleming framework; Mundell received the 1999 Nobel Prize for this contribution ^{[Mundell 1963]}. The trilemma formalised a tension that had shaped monetary policy since the gold standard: a country cannot simultaneously peg its currency, open its capital account, and run an independent monetary policy.

The contested status of free trade is as old as the discipline. The classical case (Smith, Ricardo) rests on aggregate welfare gains from specialisation; the new trade theory (Krugman 1979) and strategic trade theory (Brander and Spencer 1985) show that under increasing returns and imperfect competition well-targeted intervention can in principle shift oligopoly rents toward the home country — a counter-position that is logically sound but demanding of information and credibility that governments rarely possess. The empirical record of openness — large aggregate gains alongside concentrated distributional losses — keeps both positions in permanent, productive tension.

Bibliography Master

@book{KrugmanObstfeldMelitz2018,
  author = {Krugman, Paul R. and Obstfeld, Maurice and Melitz, Marc J.},
  title = {International Economics: Theory and Policy},
  edition = {11},
  publisher = {Pearson},
  year = {2018},
}

@book{FeenstraTaylor2014,
  author = {Feenstra, Robert C. and Taylor, Alan M.},
  title = {International Trade},
  edition = {4},
  publisher = {Worth Publishers},
  year = {2014},
}

@book{Ricardo1817,
  author = {Ricardo, David},
  title = {On the Principles of Political Economy and Taxation},
  year = {1817},
}

@article{Heckscher1919,
  author = {Heckscher, Eli F.},
  title = {The Effect of Foreign Trade on the Distribution of Income},
  journal = {Ekonomisk Tidskrift},
  year = {1919},
}

@book{Ohlin1933,
  author = {Ohlin, Bertil},
  title = {Interregional and International Trade},
  publisher = {Harvard University Press},
  year = {1933},
}

@article{StolperSamuelson1941,
  author = {Stolper, Wolfgang F. and Samuelson, Paul A.},
  title = {Protection and Real Wages},
  journal = {Review of Economic Studies},
  volume = {9},
  number = {1},
  pages = {58--73},
  year = {1941},
}

@article{Mundell1963,
  author = {Mundell, Robert A.},
  title = {Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates},
  journal = {Canadian Journal of Economics and Political Science},
  volume = {29},
  number = {4},
  pages = {475--485},
  year = {1963},
}

@article{Leontief1953,
  author = {Leontief, Wassily W.},
  title = {Domestic Production and Foreign Trade: The American Capital Position Re-Examined},
  journal = {Proceedings of the American Philosophical Society},
  volume = {97},
  number = {4},
  pages = {332--349},
  year = {1953},
}

@article{Krugman1979,
  author = {Krugman, Paul R.},
  title = {Increasing Returns, Monopolistic Competition, and International Trade},
  journal = {Journal of International Economics},
  volume = {9},
  number = {4},
  pages = {469--479},
  year = {1979},
}

@article{BranderSpencer1985,
  author = {Brander, James A. and Spencer, Barbara J.},
  title = {Export Subsidies and International Market Share Rivalry},
  journal = {Journal of International Economics},
  volume = {18},
  number = {1--2},
  pages = {83--100},
  year = {1985},
}

Prerequisites

52.02.01

Tier anchors

beginner: Krugman, Obstfeld & Melitz 2018 International Economics: Theory and Policy (Pearson) Ch. 2–4 in plain English — why nations trade, gains and losses, the trade balance
intermediate: Krugman, Obstfeld & Melitz 2018 International Economics (Pearson) Ch. 5–6, 10, 17–19 (formal Ricardian and Heckscher-Ohlin models, tariffs, exchange rates, Mundell-Fleming)
master: Krugman & Obstfeld International Economics (10e); Feenstra & Taylor International Trade (2014); Mundell 1963 Capital Mobility and Stabilization Policy

References

Krugman, Obstfeld & Melitz — International Economics: Theory and Policy · 11th ed., Pearson 2018. Ch. 3–4 the Ricardian model and gains from trade; Ch. 5–6 Heckscher-Ohlin and Stolper-Samuelson; Ch. 10 trade-policy instruments and welfare; Ch. 17–19 exchange-rate determination, the Mundell-Fleming IS-LM-BP model, and the macroeconomic trilemma.
Feenstra & Taylor — International Trade · 4th ed., Worth 2014. Ch. 4–6 the factor-proportions theory and factor-price equalisation; Ch. 7–8 movement of labour and capital; Ch. 9–11 import tariffs, quotas, export subsidies and the welfare geometry of trade policy.
Ricardo — On the Principles of Political Economy and Taxation · 1817, Chapter 7 'On Foreign Trade'. The England–Portugal cloth-and-wine example that introduced comparative advantage: a country gains by specialising where its relative labour cost is lowest, regardless of absolute productivity.
Mundell — Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates · Canadian Journal of Economics and Political Science 29(4), 1963. Establishes the open-economy IS-LM model and shows that, under perfect capital mobility, monetary policy is effective under floating rates and fiscal policy under fixed rates — the policy trilemma.
Heckscher — The Effect of Foreign Trade on the Distribution of Income · Ekonomisk Tidskrift 1919. The factor-endowment explanation of trade: comparative advantage arises from differences in relative factor abundance and factor intensity, and trade redistributes income toward the abundant factor.

Estimated time

beginner: 15 min
intermediate: 40 min
master: 90 min