Absolute Advantage Theory: The Absolute Advantage Theory was first introduced by Adam Smith in his book “The Wealth of Nations”. According to this theory, a country should specialize in producing and exporting goods and services in which it has an absolute advantage, which means it can produce a good or service more efficiently and at a lower cost than any other country. In doing so, a country can trade the goods and services it produces for those it does not produce, resulting in overall economic gains for all countries involved.

For example, if country A can produce both wheat and cloth more efficiently than country B, then country A should specialize in producing both wheat and cloth, and export them to country B in exchange for goods and services that country B produces more efficiently than country A.

Comparative Advantage Theory: The Comparative Advantage Theory was introduced by David Ricardo, who argued that even if one country has an absolute advantage in producing all goods and services, it still makes sense for countries to specialize and trade with one another based on their relative efficiencies in producing different goods and services.

This theory suggests that a country should specialize in producing and exporting goods and services in which it has a comparative advantage, which means it can produce a good or service at a lower opportunity cost than any other country. The opportunity cost of producing a good or service is the value of the next best alternative that must be given up to produce it.

For example, if country A can produce both wheat and cloth more efficiently than country B, but the opportunity cost of producing wheat in country A is higher than the opportunity cost of producing cloth, while the opposite is true for country B, then country A should specialize in producing cloth, and country B should specialize in producing wheat, and they should trade with each other.

Heckscher-Ohlin Theory: The Heckscher-Ohlin Theory is based on the idea that countries specialize in producing goods and services that use their abundant factors of production, and trade with other countries for goods and services that use their scarce factors of production. This theory suggests that trade can increase the efficiency of resource allocation and can lead to overall gains for all countries involved.

For example, a country that has abundant labor and scarce capital will tend to specialize in producing labor-intensive goods, while a country that has abundant capital and scarce labor will tend to specialize in producing capital-intensive goods. When these two countries trade with each other, they can both benefit from the exchange of goods and services.