The standard two-sector model of trade has been modified to explore the consequences of removing its static framework. It has been shown that the reallocation effects consequent upon a change in terms of trade ( or consequent upon the opening of trade) may lead to capital decumulation in the economy and, paradoxically, to an expansion of trade varying with the rate of capital decumulation. Thus trade expansion may be accompanied by economic atrophy. This analysis may be used to understand the economic conditions in some of the colonies, viz., India in the first half of the nineteenth century. It may also be applied in reverse to explain how colonial trade became an ‘engine of growth’ in the metropolitan countries.