Chapter 23

Theory of International Trade, Trade Policy and Foreign Exchange

After studying this chapter, you should be able to understand:

  • The classical approach considered the differences in productive efficiencies between nations as the reason for the motivation to trade between countries.
  • When two countries are involved in trade with each other producing only those goods in which they have an absolute advantage, it results in an increased production for the two combined.
  • According to the Heckscher–Ohlin theory of trade, international trade takes place due to the comparative advantage in the cost of production, which can be explained in terms of differences in factor endowments between countries.
  • The ‘terms of trade’ is the rate at which ...

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