International trade has always been present since civilization. The need for trading exists due to the difference in availability of resources and comparative advantages. Nowadays, with globalization, it is impossible for a country to remain isolated and be self sufficient. Over time, there has been ample controversy on the theory of international trade. Some of these theories will be discuss below.

2 Comparative Advantage Theory

The theory of comparative advantage, also known as the theory of comparative cost, was developed by David Ricardo. According to this theory, it matters not a bit whether a country has absolute advantage in one line of production or all lines of production. What matters is the comparative difference and each country should specialize in the production of those goods in which it has the greatest comparative advantage or least comparative disadvantage. Thus, for international trade and specialization to be profitable and beneficial, there is a need for comparative differences, that is, differences in relative cost or differences in opportunity cost. Therefore, this theory compares the capacity of a country through its commodities.

The theory of comparative advantage relies on the following assumptions:

There are two countries and two commodities

There is perfect competition

Labour is the only factor of production and it is homogenous and perfectly mobile within a country but perfectly immobile across nations.

Cost of production is expressed in terms of labour, that is, a commodity is valued in terms of how much it costs a labour for producing it.

There is free trade, that is goods can move freely across nations

There is constant return to scale

There is neither technological change nor transportation cost

Trade takes place on barter system

There is full employment in both countries

3 Heckscher-Ohlin Theory

Although comparative difference is the source for international trade, Heckscher- Ohlin (H-O) states that it is the conditions that bring about this comparative advantage that matter. In other words, how well a country is endowed with a given factor will influence its factor prices and ultimately its commodity prices. Hence, according to H-O theory, factor abundance plays a key role for comparative difference in contrast to David Ricardo which advocates that labour is the sole responsible factor for international trade to be beneficial.