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Business, Politics & Society

Theories of Trade (Wonkish)

Paul Krugman

Lesson time 13:12 min

Through a discussion of his Nobel Prize-winning idea, the New Trade Theory, Paul explains the history and continued impact of trade on the economy.

Paul Krugman
Teaches Economics and Society
Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive history, policy, and help explain the world around you.
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One of the seductions, if you like, one of the traps that people often fall into in all areas of economics, but particularly I think when it comes to global economics, is thinking that history always moves in one direction, that the world is always getting more global, that the world is always getting flatter. Then what you actually find out if you just do a little bit of history, look at the available data, is that international trade has been very much a story of ups and downs. It wasn't possible to have a global economy until you had certain basic technologies in place, but those basic technologies were the railroad, the steamship, and the telegraph. And there was, in fact, a global economy-- really very much a global economy-- in place by the beginning of World War I. People in England were eating mutton from New Zealand by 1910, right? So it was a global economy, which mostly went away between the outbreak of World War I and the end of World War II. International commerce doesn't do very well when U-boats are sinking the freighters, but largely it went away because countries imposed tariffs, import quotas. There were a lot of restrictions placed on international trade. And so international trade by 1950 was way lower. It was back down to kind of the levels that it had been at before the railroads and the steamships. It's been a long upward march since then, although even circa 1980 there really wasn't all that much more international trade relative to the size of the world economy than there had been in 1913. After about 1990, we had a real explosion of international trade. Hyperglobalization some people call it, and that's been a big new factor. But the point is that this is a story with ups and downs. There are different phases. The driving forces behind trade have changed and may change again. There's some evidence that we're now looking at a plateau, and actual trade seems to have leveled off as a share of the world's economy. That type of globalization may have been a one-time episode, not that the world gets ever-more engaged in trade. What trade does is it widens the field of division of labor, of specialization. So, you know, Adam Smith starts with a pin factory where there's just a bunch of guys in one building who are doing different things. What trade does is it lets people who may be on different continents do different pieces of a production process. It actually makes us-- makes the world richer in two ways because there are two reasons why having people specialize in different things can be useful. One person becomes a surgeon and another person becomes an engineer. Why doesn't-- why don't we have everybody be both a surgeon and an engineer? Well, one reason is difference in aptitude, right? If you can't stand the sight of blood, you probably should be an engineer, not a surgeon. So people differ, and we take advantage of those differences. It's helpful for people to concentrate on the things they d...

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For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.


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Paulo S.

You know you are a lot like Ricardo with your political view and omissions, right? ...and that is ok, as long as you don't hide it or it is a blind spot.

A fellow student

Hi Paul & anyone else reading this - you mentioned that as a % of all trade, international trade didn't change much up until the 1980s (with the exception of time during the World Wars), I'm curious if that comment is made from a US-centric perspective?

A fellow student

Prof makes it seam like international trade was only an eighteenth century thing — what about the slave, tea, sugar trades of the sixteenth and seventeenth centuries?

A fellow student

Amazing that we can learn from the person that created the Theory directly and not from an interpretation from another Professor. Thank you Paul for doing this Master Class.

A fellow student

He made a mistake in his statement that the world is getting “flatter”, I think he meant “smaller” or “closer”.

Bogdan I.

That's in the end what "Nobe Prize" was given to me. He is joking with himself.


What about considering that comparative advantages r not statical? If South Korea would have decided 2 stick 2 rice production, its comparative advantage on the 60's, Hyundai, Samsung, LG n Kia would never come 2 exist. Development stands not on trade, but on improving productivity n not sticking 2 ur current level/product, don't u think?

A fellow student

I saw us send a lot of our technical manufacturing to China with the mistaken idea that they would see the advantages of capitalism and would eliminate communism. They took advantage of us. Now we are attempting to correct the balance of trade problems (among others). The means of correcting a mistaken trade idea should be interesting to observe in the near future.

charles S.

Brilliant. Dylan gets it rights with his smiley! Ricardo's 'doing good economics while having an implicit political edge in everything he did...' guess that's some role model!


Regrading the Engineer and Surgeon example, its actually useful for the economy to have a few people who are both an engineer and a surgeon. Many innovations nowadays stem from overlap of disciplines. The engineer may think of ways to apply existing engineering tools for medical use. For example, the "Da Vinci Surgical System" comes to mind. I wonder if these types of overlapping specialties can be beneficial to industries on the macro level. Would specialization slow innovation? Is it possible to specialize too much? Seems like a higher risk for the company/local economy when consumer demand shifts.