Most common way to measure international trade: ratio to GDP

Trade balance= total value of exports – total value of imports

 Trade surplus: more exports
 Trade deficit: more imports

Trade theories:
1) Size and distance between markets determine how much countries buy and sell
2) Differences in labor, physical capital, natural resources, and tech create prouctive
advantages
3) Economies of scale create productive advantage

Gravity model
- The size of an economy is directly related to the volume of imports and exports
 Larger economies produce more goods and services so they more to export
 They generate more income from exports so people can buy more improts

Ricardian Model: differences in labor productivity between countries => differences in

production => to gains from trade
 Results: a country that produces a good with less input has an absolute advantage

Heckscher-Ohlin model: Trade can be explained by differences in resources/factors of

production
 Countries have a relative abundance of factors of production

Theorem:
- An economy is predicted to be relatively efficient at producing goods that are
intensive in its abundant factors of production =>
- An economy is predicted to export goods that are intensive in their abundant factors
of production and import goods that are intensive in their scarce factors of
production.
 Developing countries tend to export simpler, low-skilled laborintensive products such
as clothing.
 The US, the EU, and Japan export more sophisticated, high-skillintensive goods such
as chemicals and technology.