Final answer:
Comparative advantage is the theoretical model explaining why countries engage in international trade. A trade deficit occurs when imports exceed exports, and a trade surplus occurs when exports exceed imports. The current account balance includes the trade balance, net income from abroad, and net current transfers.
Step-by-step explanation:
The theoretical model that explains why countries engage in international trade is known as comparative advantage. This concept suggests that countries should specialize in producing and exporting goods and services for which they have a lower relative cost of production, while importing those goods and services for which other countries have a comparative advantage. This specialization and trade can lead to more efficient global production and increased overall economic welfare for the participating countries.
When imports exceed exports, a country experiences a trade deficit, meaning it is buying more from other countries than it is selling to them. Conversely, when exports exceed imports, a country has a trade surplus. Factors such as currency value fluctuations and protectionist policies can influence these balances. For instance, if a country's currency depreciates, its exports may become more competitively priced internationally, potentially moving from a trade deficit towards a trade surplus.
The current account balance includes the trade balance (exports minus imports), net income from abroad, and net current transfers. It provides a comprehensive measure of a country's foreign trade and economic transactions with the rest of the world over a specific time period.