1. FDI is an important factor in global 
2. Foreign trade and FDI are closely related.
3. In developing countries like India FDI in tie natural resource sector like plantations, increases rade.
4. Foreign production by FDI is useful to substitute foreign trade.
5. FDI is also influenced by the income generated from the trade and regional integration schemes.
6. FDI accelerates the economic growth by facilitating essential imports needed for development programs like capital goods, technical know-how, raw materials, other inputs and even scarce consumer goods.
7. When the export earnings of a country are not sufficient to finance for imports, FDI may be required to fill the trade gap.
8. FDI is encouraged by foreign exchange shortage, desire to create employment and acceleration of the pace of economic development.
9. Many developing countries strongly prefer foreign investment to imports.

(i) The equilibrium rate of exchange is determined in the foreign exchange market according to the general theory of value, by the interaction of demand and supply,
(ii) Y axis represents exchange rate, be cos value of rupee in terms of dollars
(iii) X axis represents demand and supply of forex.
(iv) E is the equilibrium point where DD intersects SS. The exchange rate is P₂.

Single Factoral Terms of Trade
(i) According to Viner, the single factoral terms of trade is an improvement over the commodity terms of trade.
(ii) It represents the ratio of export. price index to the import price index adjusted for changes in the productivity of factors in the production of exports.
\(\mathrm{T}_{\mathrm{f}}=\left(\mathrm{P}_{\mathrm{x}} / \mathrm{P}_{\mathrm{m}}\right) \mathrm{F}_{\mathrm{x}}\)
(iii) T_f is single factoral terms of trade index.
(iv) F_x is productivity in exports.
Double Factoral Terms of Trade
\(\mathrm{T}_{\mathrm{ff}}=\left(\mathrm{P}_{\mathrm{x}} / \mathrm{P}_{\mathrm{m}}\right)\left(\mathrm{F}_{\mathrm{x}} / \mathrm{F}_{\mathrm{m}}\right)\)
(i) It takes into account the productivity in country's exports and productivity of foreign factors.
(ii) F_m is import index (which is measured as index cost in terms of quantity of factors of production employed per unit) of imports.

Introduction
1. Modern theory of international trade was developed by Heckscher and Bertil Ohlin.
2. This theory says that basis for international trade is the differences in factor endowments.
3. So this theory is also called Factor Endowment Theory.
Theory
1. International differences in comparative costs is due to:
(i) Difference in the endowments of factors of production between countries.
(ii) Differences in the factor proportions required in production.
Assumptions
1. There are two countries, two commodities, two factors (2 x 2 x 2 model).
2. Countries differ in factor endowments.
3. Commodities are categorized in terms of factor intensity.
4. Countries use same production technology.
5. Countries have identical demand conditions.
6. There is perfect competition in product and factor markets in both the countries.
Explanation
1. According to Heckscher-Ohlin, "a capital abundant country will export the capital intensive goods, while labour abundant country will export the labour intensive goods".
2. A factor is regarded abundant or scarce in relation to the quantum of other factors.
3. A country is richly endowed with capital only if the ratio of capital to other factors is higher than other countries.
Particulars India America Supply of Labour 50 24 Supply of Capital 40 30 Capital-Labour Ratio 40/50 = 0.8 30/24 = 1.25 4. Even though India has more capital (40) compared to America (30) in absolute terms, yet America is more richly endowed with capital because the ratio of capital in India is $0.8$ which is less than that in America (1.25).
Criticism
1. Factor endowment of a country may change over time.
2. The efficiency of the same factor (labour) may differ in the two countries.

Introduction
1. David Ricardo formulated comparative cost theory.
2. J. S. Mill, Marshall, Taussig refined it.
Theory
1. Trade can take place even if absolute cost difference is absent but there is comparative cost difference.
Illustration
2. Ricardo's theory is explained with an example of production costs of cloth and wheat in America and India.
(Units of labour needed to produce one unit)

Country	Cloth	Wheat	Domestic Exchange Ratios
America	100	120	1 Wheat = 1.2 Cloth
India	90	80	1 Wheat = 0.88 Cloth

(i) India has absolute advantage in production of both cloth and wheat.
(ii) But, India will produce wheat where she enjoys comparative cost advantage (80 / 120<90 / 100).
(iii) For America the comparative cost disadvantage is lesser in cloth production.
(iv) So America will specialize in cloth production and export it to India in exchange for wheat.
(v) Both nations gains.
(vi) With trade India can get 1 unit of cloth and 1 unit of wheat by using 160 labour units (80+80). With no trade India has to use 170 units of labour (80+90).
(vii) The same explanation applies to America too.
Criticisms
(i) Labour cost is a small portion of the total cost. So the theory based on labour cost is unrealistic,
(ii) Labourers in different countries are not equal in efficiency.