Profit and Profit and Externalities as a Basis for International Trade

Abstract

In the world trading system there has been an increase in unilateral trade and bilateral trade of differentiated products. However, the main trade theories have difficulties providing an explanation for unilateral trade. We show that profit seeking abroad by merchants or countries originates trade, and argue that profit, and profit and externalities are a basis for trade. This provides an explanation for both trades. We also argue that comparative profit advantage makes privately owned or state-owned firms the candidates for complete specialization. Finally, we use our trade models to suggest an explanation for the increase in trade of differentiated products.

Keywords: Profit, Comparative Profit advantage, Externalities, International Trade

JEL Classification: F01, F12