Final answer:
International trade theory explains differences in production costs, technology levels, exchange rates, and factor use efficiency, all under the umbrella of the theory of comparative advantage which encourages countries to trade based on differing opportunity costs.
Step-by-step explanation:
International trade theory explains several economic phenomena, including differences in production costs, differences in levels of technology, foreign exchange rates, and differences in efficiency of factor use. Notably, the theory of comparative advantage underlies much of this, suggesting that countries should trade if they have different comparative advantages in producing goods, which leads to gains from trade. This concept is exemplified by the fact that countries with large differences in opportunity costs will engage in trade, making it possible for even small economies to achieve economies of scale, benefit from competition, and enjoy a variety of offerings from several producers.
Specialization, according to international trade theory, allows countries to focus on producing goods for which they have a comparative advantage, thereby trading to obtain other goods more cost-effectively. Importing and exporting activities can significantly affect a country's economy, influencing factors like the balance of trade, domestic employment, and the GDP. Exchange rates play a critical role in trade by affecting the relative prices of imports and exports, and these rates can change with adjustments in monetary policy or economic conditions.