THEORIES OF

INTERNATIONAL TRADE
INTERNATIONAL TRADE
International Trade usually refers to the exchange of goods and
services across international borders or territories.
• Gains from trade
• Protectionism
• Free Trade Agreements (FTAs)
• Trade and Development
Why do countries trade?
ABSOLUTE ADVANTAGE vis-à-vis
COMPARATIVE ADVANTAGE
Absolute advantage refers to the advantage in the production of a
good enjoyed by one country over another when it uses fewer
resources to produce that good than the other country does.

Comparative advantage refers to the advantage in the production of

a good enjoyed by one country over another when that good can be
produced at lower cost in terms of other goods than it could be in the
other country.
ABSOLUTE ADVANTAGE vis-à-vis
COMPARATIVE ADVANTAGE
Mobile Phones Apples Grown by
Country / Good Produced by 1,000 1,000 workers
workers (in millions) (in millions)
South Korea 12 24
United States 13 39

Opportunity Cost of a Mobile Phone

SK: To produce 12 million mobile phones, it has to give up 24
million apples
US: To produce 13 million mobile phones, it has to give up 39
million apples
ABSOLUTE ADVANTAGE vis-à-vis
COMPARATIVE ADVANTAGE
Mobile Phones Apples Grown by
Country / Good Produced by 1,000 1,000 workers
workers (in millions) (in millions)
South Korea 12 24
United States 13 39

Opportunity Cost of An Apple

SK: To produce 24 million apples, it has to give up 12 million
mobile phones
US: To produce 39 million apples, it has to give up 13 million
mobile phones
ABSOLUTE ADVANTAGE vis-à-vis
COMPARATIVE ADVANTAGE
Trade surplus is a situation when a country exports more than it
imports.

Trade deficit occurs when a country imports more than it exports.