Theories of International Trade





The present chapter explains the theoretical basis of international trade. The focus, in particular, is to:

  • Explain the various theories of international trade, ranging from the mercantilist version to classical theories of absolute and comparative cost advantage, the factor endowment theory, neo-factor proportions theory, country similarity theory, intra-industry trade, trade in intermediate products and services, and finally, Porter’s theory of national competitive advantage.
  • Discuss the static and dynamic gains from trade.
  • Explain terms of trade and their various forms.

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