Trade Theories explain why countries trade and patterns of specialization. Mercantilist theory (historical): Trade surplus (exports > imports) indicates success; maximize exports, minimize imports; modern recognition: simplistic, ignore mutual gains. Absolute advantage (Adam Smith): Country with absolute cost advantage (producing more with same resources) in any good should specialize and trade. Comparative advantage (David Ricardo): Even without absolute advantage, specializing in good with lower opportunity cost is beneficial; enables trade gains even for less developed country. Factor proportion theory (Heckscher-Ohlin): Countries specialize in goods using abundant factors; labor-rich countries export labor-intensive goods, capital-rich export capital-intensive. Product cycle theory: Products move through stages (innovation, maturity, decline); initial production in advanced countries, shifts to developing countries as becomes standardized. Gravity model: Trade volume between countries determined by sizes (GDPs) and distance (shipping costs); large countries trade more, distance reduces trade. New trade theory: Imperfect competition, increasing returns, network effects explain trade patterns. Vernon cycle: Trade patterns change as technologies mature. Indian context: Comparative advantage in labor-intensive products, services; capital-intensive imports; evolving toward higher-value products. ICAI focus: Distinguishing theories, understanding comparative advantage. Exam tip: Comparative advantage is most fundamental; remember 'opportunity cost difference' differentiates it from absolute advantage.