International Trade

Trade Theories

Absolute advantage: This theory, originally proposed by Adam Smith, suggests that countries should specialise in the production of goods and services that they can produce more efficiently than others.
Comparative advantage: Detailed by David Ricardo, the law of comparative advantage states that a country should specialise in the production of goods and services that it can produce at a lower opportunity cost than other countries.
Heckscher-Ohlin theorem: This theory posits that a nation will export the commodity that makes intensive use of the nation’s relatively abundant and cheap factor(s) of production.

Current account: Includes the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (like foreign aid).
Capital account: Consists of international transfers of ownership of fixed assets and the acquisition/disposal of non-produced, non-financial assets.
Financial account: Records investment flows into and out of a country, including foreign direct investment (FDI), portfolio investment (like stocks and bonds), and changes in reserve assets.

Fixed exchange rates: The value of the currency is set by the central bank and is maintained by the national government.
Floating exchange rates: The currency value fluctuates in response to foreign exchange market mechanisms.
Managed floating exchange rates: The exchange rate is largely left to market forces but occasionally intervened by the central bank to prevent volatility.

Economic growth: International trade can fuel economic growth through increased production and consumption.
Income distribution: Trade can influence income distribution within and between countries.
Competition and efficiency: Increased foreign competition can lead to greater efficiency among domestic industries.
Dependency: Over-reliance on certain exports or import sources can create significant economic vulnerability.

Tariffs: These are taxes imposed on imported goods which make them more expensive and less competitive than domestic products.
Quotas: These are limits on the quantity of certain goods that can be imported.
Non-tariff barriers: These include rules and regulations designed to make it more difficult for foreign companies to trade with or within the country.
Trade liberalisation: The removal or reduction of restrictions or barriers on the free exchange of goods between nations.

World Trade Organisation (WTO): Aims to promote free trade and settle trade disputes.
International Monetary Fund (IMF): Promotes international monetary cooperation and provides financial assistance to countries facing balance of payments issues.
World Bank: Provides loans and grants to poorer countries for development purposes.
United Nations: Works on various economic development projects, including the Sustainable Development Goals.