Trade Theory

The aim of Trade Theory is to explain the existing patterns of trade, the impact on the domestic economy, and the type of public policies that should be introduced to increase a country's well-being. Neoclassical theories focus on the optimal repartition of production among countries in order to take advantage of each nation's availability of resources (such as labor or natural/physical capital). They conclude that all countries can gain by trade thanks to international specialization and a more efficient use of resources. Modern theories try to reinforce this result by relaxing the most stringent assumptions (such as perfect competition, no transaction cost or decreasing returns to scale), in order to explain why trade often occurs between countries with similar factor endowment and productivity levels, and why firms do offshoring.