Inundation

Classical Theory of International Trade : The Classical theory of international trade is given by Adam Smith and David Ricardo. The theory explains the condition of international trade specialization and benefits of trade.According to the theory international trade is a case of geographical speculation. Different countries have different set of resources. In this process a country may have more of a resource. The abundance of a resource gives cost advantage in the production of a commodity. The cost advantage is the basic of specialization and international trade.Assumptions:1. The theory of international trade is based on the labor theory of value. With this, value of any product can be explained in term of labor units.2. It is a 2x2 model, 2 countries and 2 commodities. 3. The theory assumes barter system of exchange. 4. It is a case of free trade without any restriction from either country. 5. No transport cost. 6. Perfect competition and full employment. 7. Factors of pr...

What is Balance of Payment? The balance of payments theory is the modern and most satisfactory theory of the determination of the exchange rate. It is also called the demand and supply theory of exchange rate. According to this theory, the rate of exchange in the foreign exchange market is determined by the balance of payments in the sense of demand and supply of foreign exchange in the market. Here the term 'balance of payments' is used in the sense of a market balance. If the demand for a country's currency falls at a given rate of exchange, we can speak of a deficit in its balance of payments. Similarly, if the demand for a country's currency rises at a given rate of exchange, we can speak of surplus in its balance of payments. A deficit balance of payments leads to a fall or depreciation in the external value of the country's currency. A surplus balance of payments leads to an increase or appreciation in the external value of the country's curren...