Trade Theories
Absolute Advantage (Adam Smith):
A country can produce a good more efficiently (using fewer resources) than another country.
Comparative Advantage (David Ricardo):
A country should specialize in producing goods where it has lower opportunity costs.
Heckscher-Ohlin Theory:
Countries export goods that use their abundant factors intensively, import goods that use their scarce factors intensively.
Modern Trade Theories:
- Product Life Cycle: Trade patterns change as products mature
- Economies of Scale: Trade allows mass production benefits
- Imperfect Competition: Monopolistic competition in trade
Benefits of International Trade:
- Economic Growth: Access to larger markets
- Efficiency Gains: Specialization and competition
- Lower Prices: Increased competition reduces costs
- Innovation: Exposure to new ideas and technologies
- Employment: Job creation in export industries
