Ricardian and Heckscher-Ohlin models of trade generally describe countries’ differences. Further, they give important insights into patterns and determinants of trade.

A country producing goods at a lower cost than its trading partner has an absolute advantage. On the other hand, a country is said to have a comparative advantage over others in the production of a particular good if it…

The costs and benefits of trade are subjects that elicit a lot of interest in most countries. However, most economists agree that the advantages of international trade probably outweigh its disadvantages. Below are the main benefits and costs associated with…

Gross domestic product (GDP) measures the market value of goods and services from production factors such as labor and capital in a country within a given period of time. On the other hand, gross national product (GNP) measures the market…

There are many effects of exchange rates on countries’ international trade and capital flow. Most of them are listed below. Changing Prices of Currencies Shifts in the supply and demand of products change the prices of those products. Similarly, constant…

Almost every exchange rate regime has its flaws, virtues, and particularities. Since exchange rates in different currencies fluctuate due to the influence of market forces, some nations peg their currencies on other currencies. Others, still, have market-determined floating rate regimes….

Forward Discount A forward discount is when the current domestic spot exchange rate is traded at a higher level than the current domestic future spot rates. The analysis of the expectations from a market depends mostly on discounts and premiums….

The interest rate difference between two countries affects the spot and forward rates. Using a single period analogy, an investor who has funds to invest in treasury securities, has two alternatives:

Forward Quotations The points on a forward rate quote are the differences between the spot exchange rate quote and the forward exchange rate quote. These points are scaled to relate to the last decimal in the spot quote. It is…

Spot Exchange Rates It is possible to back out the cross rates given two exchange rates involving three currencies. Considering a foreign exchange market with the exchange rate between the South African rand and the Chinese yuan, this market can…