Definition of international trade

The movement of goods and services through different countries and their markets is known as international trade,foreign trade or world trade. It is an economic activity that is carried out through regulations to establish the participants in the exchange and is carried out using foreign exchangeand different forms of payment.

International trade is possible thanks to trade liberalization and the elimination of tariff and non-tariff barriers. Find out more about the characteristics and models of foreign trade, below.

Models of international trade

Throughout history, a series of theories have emerged that explain the process of world trade, trying to glimpse what are the causes of this economic activity and the reasons that lead countries to trade. They also study the effects of international trade on production and consumption in regions and countries.

Next, we show you some of the most established theories in relation to the fundamentals of international trade:

  • Adam Smith's Absolute Advantage Model: The classical theory of international trade lays its foundations in the work of Adam Smith, who defended the little regulation of trade, since it is regulated only with the law of supply and demand, and the growth process, thus being in favor of the absolute advantage and international mobility of productive factors.
  • David Ricardo's Comparative Advantage Model: this is another of the most widespread theories about international trade. In the opinion of David RicardoThe decisive factor was the relative costs, which are the result of the comparison with other countries. Thus, a country always obtains advantages from foreign trade, even when production costs are higher. Countries tend to specialize in that production in which they are comparatively more efficient.
  • Trade Gravity Model: determines that trade between two countries is proportional to the economic size of both countries, calculated through their respective GDP, and inversely proportional to the distance between the two.

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