Distinguish trade creation from trade diversion.5.

Meaning: the exchange of goods, services and (increasingly) data across borders — the specialisation and exchange logic of ECO-I Unit 2 applied to nations.Why nations trade (the theory in three steps):1. Absolute advantage (Smith): trade where each country is absolutely cheaper at something;2. Comparative advantage (Ricardo) — the core theorem: trade benefits both even when one country is better at everything: specialise where your relative (opportunity) cost is lowest. Worked example: Nepal and India both can produce carpets and rice; even if India is cheaper at both, Nepal's opportunity cost of carpets (in rice forgone) is lower — both gain by trading at a rate between their two internal cost ratios. (The exam's favourite two-country, two-good table — construct one.)3. Modern extensions: factor endowments (Heckscher–Ohlin — the abundant factor's goods), scale economies, product differentiation, and the global value chains (the good crosses borders many times before it is a good).Importance (the list with Nepal's twist):1. Gains from specialisation and scale; variety and quality for consumers;2. Small open economies live on it: Nepal's trade-to-GDP ratio is among the world's high — fuel, machinery, medicine, and half the kitchen arrive by border;3. Technology and knowledge transfer; competition's discipline on domestic producers;4. Foreign exchange earnings (the import bill's payment);5. The risks: vulnerability to external shocks and price swings; the small producer against the…