International Trade - Theory and Policy, 2010a

3.3 Example of a Trade Pattern
LEARNING OBJECTIVE
1. Learn how to describe a mutually voluntary exchange pattern and specify both the
terms of trade and the final consumption bundles for two traders.
Suppose after some discussion Farmer Smith and Farmer Jones agree to amutually voluntary exchange of
six apples for six oranges (see Figure 3.1 "Two-Farmer Trade Pattern"). The terms of trade is six apples per
six oranges, or one apple per orange. After trade, Farmer Smith will have four oranges and six apples to
consume, while Farmer Jones will have six oranges and four apples to consume. As long as the trade is
voluntary, it must hold that both farmers expect to be better off after trade since they are free not to trade.
Thus mutually voluntary trade must be beneficial for both farmers.
Figure 3.1 Two-Farmer Trade Patter
Sometimes people talk about trade as if it were adversarial, with one side competing against the other.
With this impression, one might believe that trade would generate a winner and a loser as if trade were a
contest. However, a pure exchange model demonstrates that trade is not a zero-sum game. Instead, when
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