A Contribution to the International Trade Theory

This paper seeks a rigorous microfoudation that is the key to explaining market behaviour and general equilibrium mechanism. From this microfoundation, home margin and foreign markup are formulated upon demand and cost structures between the home country and the foreign country. The trade gain rules are then developed for the comparative advantage analysis in international trade. The zero trade gains rules occur in countries with no international trade. The non-zero trade gain rule implies that both the home and foreign countries benefit from international trade. The necessary condition for a home country to export is a relatively high home margin over other exporting countries. However, the sufficient condition for a home country to be accepted import by a foreign country is that the home country has a relatively high foreign markup over other exporting countries. These trade gain rules also provide implications for domestic trade with product differentiation and cost efficiency at the industry and firm levels. Since the demand structure is connected with the cost structure between the home and foreign markets, trade flows and gains can be analysed at the country, industry, and firm levels. The paper contributes to the international trade theory that provides the theoretical foundation for empirical research on international trade and trade policy.