Unemployment, international trade and factor prices

Abstract

Classical economists advocated free trade because they concentrated on the gains from trade ignoring the effect of international trade on income distribution. Though, it is diagrammatically possible to prove that free trade would take the country as a whole to a higher indifference curve, it was not possible to say un ambiguously whether international trade would lead to an increase in the welfare of all the people, or at least keep a few on the pre-trade level of welfare and Vnove others to a higher level of welfare. Stolper and Samuelson, immediately after the publication of the Heckscher-Ohlin trade model, argued that imposition of tariff would increase the reward of the country's relatively scarce factor. Conversely, any movement towards free trade would increase the reward of the country's relatively abundant factor.