Theories of International Trade

Theories of International Trade explain why countries trade goods and services. The most common theory, Comparative Advantage, suggests countries benefit by specializing in producing items where they are relatively more efficient and trading with others. Absolute Advantage states that countries should produce goods they can make best. Heckscher-Ohlin emphasizes a country’s resources, like labor or capital, shaping what it exports. These theories help understand trade patterns and the benefits of global exchange, showing that nations gain by exchanging goods they produce efficiently for those they don’t.