The Basic Laws of Trade

17 October 2022, Version 3
This content is an early or alternative research output and has not been peer-reviewed by Cambridge University Press at the time of posting.


We develop hypothetical basic laws of trade to improve the theory of comparative advantage and the theory of international trade. According to the theory of comparative advantage of David Ricardo and Ohlin-Heckscher, countries with different resources and technology will benefit from trading, regardless of competitiveness. This is the core theory in international trade. However, in the real world, this theory does not always work well. Some countries may gain from trading, some may not, and some may even lose. The total gain for all parties is also not optimal. The basic laws of trade could fix this problem. They restore the trade balance at the very heart of international trade. In that way, the basic laws make all countries benefit from trading, regardless of competitiveness and cost. Gains from trade are also optimal for all parties. To demonstrate the workability of this hypothesis, we make trade simulations 2x2 and 5x20.


Basic laws of trade
theory of international trade
theory of comparative advantage
gains of trade
international economics
exchange rate

Supplementary materials

Comparative advantage and trade simulation 5x20 model
We simulated 5 countries, namely China, South Korea, Indonesia, Turkiye, and India. Each country produces and consumes 20 products, namely A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, P, Q, R, S, and T. The production costs of each product in each country are random with a range in their respective national currencies (China between 60 – 120 Chinese yuan, South Korea between 12,000 – 24,000 Korean Won, Indonesia between 145,000 – 290,000 Indonesian rupiahs, Turkiye between 170 – 340 Turkish lira, and India between 930 – 1860 Indian rupees). We assume that all goods can be traded (tradable) between countries. All countries can trade to get goods at a lower cost and larger market. We use 3 types of exchange rates to compare the results, namely the true exchange rate and misaligned 1 and 2.

Supplementary weblinks


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