ABSTRACTBy postulating convex‐to‐origin Phillips curves and a concave‐to‐origin indifference map in the unemployment‐inflation space, we find that, the pure gains from trade aside, the post‐trade equilibrium under flexible exchange rates cannot be superior to that under autarky because a variable exchange rate generates no countercyclical forces. Under a fixed exchange rate regime, a country can be better off (worse off) after trade than before trade if the foreign rate of inflation is lower (higher) than that prevailing in autarkic equilibrium. If countries co‐operate and jointly reduce their rates of inflation, they can improve their welfare and yet maintain balance of payments equilibrium. If the rate of profit is a variable determining the position of the Phillips relationship, international trade improves the welfare of the labour‐abundant and worsens that of the capital