Trade:

Trade can be defined as the business of buying and selling goods and services and takes place at different levels- between individuals, regions or countries. The Heckscher-Ohlin theory explains why countries trade goods and services with each other. One condition for trade between two countries is that the countries differ with respect to the availability of the factors of production. According to the Heckscher-Ohlin theory, a country specializes in the production of goods that it is particularly suited to produce. Specialization in production and trade between countries generates, according to this theory, a higher standard-of-living for the countries involved. Because countries have different natural, human, and capital resources and different ways of combining these resources, they are not equally efficient at producing the goods and services that their citizens want. The decision to produce any good or service has an opportunity cost, which is the amount of another good or service that might otherwise have been produced. Given a choice of producing one good or another, it is more efficient to produce the good with the lower opportunity cost, using the increased production of that good to trade for the good with the higher opportunity cost. When a nation can produce more of a good with the same resources that another country can, it is said to have an absolute advantage in the production of that good. If the second country has an absolute advantage in producing a good that the first country wants, both will be better off if they specialize and trade. But trade is usually beneficial to both countries even if one has an absolute advantage in the production of both goods that are to be traded. Given any two products, a nation has a comparative advantage in the product with the lower opportunity cost. The terms of trade must be such that both countries lower the opportunity costs of the goods they are getting from the trade. In international trade, important topics involving trade include trade negotiations, trade blocs, trade deficit, trade disputes, trade diversion, and trade liberalization.