This paper explains the differential impacts of trade on countries in terms of institutional
differences which result in factor market distortions. Autors modify the Ricardian, Specific
Factor and Hecksher Ohlin models of trade to capture these. Trade has both terms
of trade effects and output effects. Both work to raise welfare in an undistorted
economy. In a distorted economy, price effects work to improve welfare, while output
effects work to reduce it. Large distorted countries are more likely to lose from
trade as beneficial price effects are lower. In addition the greater the substitutability
between goods, the more likely it is that welfare rises through trade.