International Trade Theories:

Different ideas of exchange of goods and services across the global boundaries have been explained through different models of international trade. These theories of international trade have gone through several changes from time to time. But one point to be noted is that the fundamental principle behind international trade is not very much different from that involved in the domestic trade. Basically, the primary objective of trade is to maximize the gains from trade for the parties engaged in the exchange of goods and services. Be it domestic or international trade, the underlying motivation remains the same. What separates domestic trade from international trade is the cost involved and factors of production. International trade involves exchange across borders and this increases the cost of trading. Factors like tariffs, the terms of trade, restrictions, time costs and costs related with legal systems of the countries involved in trade make the international trade a costly affair; however, the extent of restrictions and legal hassles are considerably low in case of domestic trade or interregional trade.

The factors of production have a central role when it comes to the comparison between international trade and domestic trade. It cannot be denied that mobility of factors of production is less across nations than within the domestic territory. In case of domestic trade, the incidence of trade in factors of production like labor and capital is very common; but case of international trade exchange of goods and services is an important source of total revenue. International trade theory has always been a preferred field of research amongst the traditional and contemporary economists. The models of international trade try to analyze the pattern of international trade and suggest ways to maximize the gains from trade.

The different international trade theories include the strgon Ricardian theory of comparative advantage, Smith's theory of absolute advantage, the Heckscher-Ohlin model, Mill's theory of reciprocal demand, Harberler's theory of opportunity costs, factor-price equalization theorem, and other new theories of international trade.