International Trade Theory

International trade theories are a set of economic models that aim to explain trade patterns, meaning which goods are exported and imported, and who imports and exports those goods. The theories allow us to say something about the costs and benefits of globalization to whole economies and individual groups within them.

Modern international trade theory is based on David Ricardo’s “Law of Comparative Advantage,” an important and long-lived concept, which says that a country should engage in trade with another country, even if the first country is more efficient in producing all the goods. The idea is that even if a country has absolute advantage (being more efficient) in the production of goods, that country may be better off trading with another (less efficient) country by exploiting lower relative opportunity costs.