Explain the theory of comparative advantage and the gains from international trade, and discuss how global trends affect a developing economy such as Sri Lanka.

1. 1 · Introduce why countries trade. Differences in resources, climate, skills and technology.
2. 2 · Absolute and comparative advantage. Adam Smith's absolute advantage; Ricardo's comparative advantage based on opportunity cost.
3. 3 · Numerical example. Sri Lanka 12 tea or 4 parts; B 4 tea or 3 parts. Opportunity costs 3 vs 1.33 tea per part; specialise; world output +40 tea, +70 parts.
4. 4 · Show the gains. [Diagram: two PPCs with consumption points beyond each country's own PPC after trade]
5. 5 · Terms of trade and limits. Gains need terms between the two opportunity costs; limits include transport costs, protection and over-dependence on a few exports.
6. 6 · Global trends.
   • Interest rate rises by major central banks: capital outflows, currency pressure
   • Developed, developing and underdeveloped economies face different challenges
   • Supply-chain shifts, digital trade, protectionism, climate rules
7. 7 · Sri Lankan application. Comparative advantage in tea and apparel; imports of fuel and machinery; remittances and tourism in the balance of payments; GSP+ access to the EU.
8. 8 · Conclude. Trade based on comparative advantage raises world output, but a small open economy must manage global shocks carefully.

Scoring tip: Always compute opportunity costs in a small table. The decision of who specialises in what follows directly from it.