Chapter 3 The Pure Exchange Model of Trade
The pure exchange model is one of the most basic models of trade and is even simpler than the Ricardian model in Chapter 2. The model develops a simple story: What if one person who possesses one type of good (say apples) meets up with another person who possesses another type of good (say oranges)? What could we say about two people trading apples for oranges?
As it turns out, we can say quite a bit. The pure exchange model demonstrates the advantages of mutually voluntary exchange. And when the simple story is extended to include a second apple seller, the model shows the positive and negative effects associated with competition. When the competition is from another country, the model demonstrates how international trade can generate both winners and losers in the economy. This chapter offers the first example showing that trade can cause a redistribution of income, with some winning from trade and others losing from trade.