International Trade Theory deals with the different models of international trade that have been developed to explain the diverse ideas of exchange of goods and services across the global boundaries. The theories of international trade have undergone a number of changes from time to time. The basic principle behind international trade is not very much different from that involved in the domestic trade. 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. The cost involved and factors of production separate international trade from domestic trade.
International trade involves across border exchange and this increases the cost of trading. Factors like tariffs, restrictions, time costs and costs related with legal systems of the countries involved in trade make the international trade a costly affair; whereas the extent of restrictions and legal hassles are considerably low in case of domestic trade.
When it comes to the comparison between international trade and domestic trade, the factors of production assume a crucial role. There is no denying that mobility of factors of production is less across nations than within the domestic territory. The incidence of trade in factors of production like labor and capital is very common in case of domestic trade; while in case of international trade exchange of goods and services contributes the major share of the total revenue.
International trade theory has always been a preferred field of research amongst the traditional and contemporary economists. The international trade models attempt to analyze the pattern of international trade and suggest ways to maximize the gains from trade.
Among the different international trade theories, the Ricardian model, the Heckscher-Ohlin model and the Gravity model of trade are worth mentioning.
The Ricardian model of international trade is developed on the theory of comparative advantage. According to this model countries involved in trade, specialize in producing the products in which they have comparative advantage.
The Heckscher-Ohlin model put stress on endowments of factors of production as basis for international trade. As per this theory countries will specialize in and export those products, which make use of the domestically abundant factors of production more intensively than those factors, which are scarcely available in the home country.
The Gravity model of trade provides an empirical explanation of international trade. According to this model, the economic sizes and distance between nations are the primary factors that determine the pattern of international trade.
The international trade theories also deal with challenges before international trade, international trade laws, rules of international trade and many other related issues.