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International trade theory is a sub-field of economics which analyzes the patterns of international trade, its origins, and its welfare implications. International trade policy has been highly controversial since the 18th century. International trade theory and economics itself have developed as means to evaluate the effects of trade policies.
A good can be produced at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. [1] Comparative advantage describes the economic reality of the gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress. [2]
For various reasons, the opportunity cost is critical in this form of estimation. First and foremost, the discounted rate applied in DCF analysis is influenced by an opportunity cost, which impacts project selection and the choice of a discounting rate. [21]
According to the Washington Council on International Trade, comparative advantage is the ability to produce a good at a lower cost, relative to other goods, compared to another country. In the Principles of Economics , Ricardo states that comparative advantage is a specialization technique used to create more efficient production (52) and ...
International trade is the exchange of capital, goods, and services across international borders or territories [1] because there is a need or want of goods or services. [2] See: World economy .) In most countries, such trade represents a significant share of gross domestic product (GDP).
[6] [7] In the absence of trade, each country produces one unit of cloth and one unit of wine, i.e. a combined total production of 2 units of cloth and 2 units of wine. Here, if The UK commits all of its labor (80+100) for the production of cloth for which The UK has the absolute advantage, The UK produces (80+100)÷80=2.25 units of cloth.
The economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively limited international mobility of the capital and labour. [6] In that respect, it would appear to differ in degree rather than in principle from the trade between remote regions in one country.
Gains from trade may also refer to net benefits to a country from lowering barriers to trade such as tariffs on imports. [ 9 ] David Ricardo in 1817 first clearly stated and proved the principle of comparative advantage, [ 10 ] termed a "fundamental analytical explanation" for the source of gains from trade. [ 11 ]