- the world consists of 2 nations producing 2 commodities.
- each commodity is identical and homogeneous (wine is wine and calculator is calculator – there are no different varieties of wine or types of calculator).
- in each nation, labor is the only single input (the labor theory of value). The relative value of commodity is based solely on its relative labor content. Thus, cost is related to the amount of labor used. It means that a commodity requiring two hours of labor is twice as expensive as another commodity using only one hour of labor.
- workers are fully employed and homogeneous.
- labor can move freely among industries within a nation but cannot move between nations.
- the level of technology is fixed for both nations but different nations but different nations may use different technologies.
- all markets are perfectly competitive (price- taker assumption – no single consumer or producer has enough power to influence the market).
- no government intervention; no barriers to trade and free trade exist.
- no transportation costs.
- no money flows between nations. Exports must pay for imports.