International trade theory

International trade theory is an economics concept that analyzes cross-border trade.
Several schools of thought on the international trade theory include mercantilism, absolute cost
advantage, comparative cost advantage theory, Hecksher Ohlin (H-O Theory), Porter’s diamond
theory, and product lifecycle theory.
Trade restrictions and their effectiveness
Governments impose trade restrictions for various economic reasons. One of those is to
protect domestic employment. Imported goods or services compete with domestic industries,
which offer a threat to their survival (Anderson, 2012). Trade restrictions also protect
populations. Most of the restrictions implemented to protect customers are foods, food inputs,
and drugs, both medicinal and recreational. Governments also impose tariffs to protect critical or
strategic industries (Anderson, 2012). Some restrictions are made for national security reasons.
Trade restrictions are often effective when governments implement them. Governments use
several taxes and tariffs, antidumping proceedings, quotas, and voluntary export restrictions.
Distinguish between fixed and flexible exchange rate systems
The concept of international trade is affected by the exchange rate. The exchange rate
refers to the rate at which one currency is exchanged. The central bank usually determines a
fixed exchange rate (Ibhagui, 2018). For example, in a fixed exchange rate, the Federal Reserve
may set the US dollar exchange rate with the Great Britain Pound.
The market forces determine a floating exchange rate for the demand and supply of the
currencies in a market (Ibhagui, 2018). The differences in demand and supply determine the
exchange rate. For example, if the Great Britain pound is in high demand in the United States,

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more of it will be purchased to satisfy the demand, and the more the demand increases, the more
likely it is to exchange at a higher price against the home currency.

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References

Anderson, K. (2012). Government trade restrictions and international price volatility. Global
Food Security, 1(2), 157–166. https://doi.org/10.1016/j.gfs.2012.11.005
Ibhagui, O. W. (2018). Monetary model of exchange rate determination under floating and non-
floating regimes. China Finance Review International, 9(2), 254–283.
https://doi.org/10.1108/cfri-10-2017-0204