In chapter 6 there were two goods, one produced at home and one produced abroad. In the present chapter there are also two goods. However, both goods are produced at home and abroad. The distinction is instead between goods which have to be consumed in the country where they are produced, and goods which can be exported or imported. The former are called non-traded goods (n-goods), the latter traded goods (t-goods). For t-goods we assume that there is a competitive world market. A small open economy has to take the prices at this market as given. For n-goods there is also a competitive market, but this is confined to the single country.

The reason why some goods are not traded internationally may be transport costs or trade regulations. Some services have to be produced on the spot. However, the obstacles to international trade are seldom absolute. Transport costs do not prevent trade if the price differential between two countries becomes large enough. Only if the domestic price stays in the interval denned by the foreign price plus/minus transport costs, will there be no international trade. Other costs of trade, such as tariffs, may enlarge this interval. Transport costs depend mainly on distance. Tariffs and the costs of customs clearance may produce a discontinuity in the costs of trade at the border. However, the distance between supplier and consumer is sometimes shorter across the border than within the country.