Trade agreements occur when two or more nations agree on trade terms between them. They set tariffs and tariffs on imports and exports by countries. All trade agreements concern international trade. The second factor that can affect a country`s current account balance is the exchange rate. The exchange rate refers to the amount of currency that can be purchased by a country`s own currency. According to economic theory, if a nation has a persistent trade deficit, its exchange rate is expected to fall against its trading partners – for example, if the United States has a persistent deficit, the dollar should buy fewer currencies like the euro or the yen. This would mean that imported products would cost more because they would cost more dollars for each unit of foreign currency, resulting in lower imports. In addition, U.S. exports are expected to grow, as foreigners can buy more of their products for any unit of their currency. In economic theory, the cost of all factors of production that could cross borders would have an equal cost in all commercial countries if the factors of production are entirely mobile. This would mean that the basis of the comparative advantage for trade between countries would decrease and that there would ultimately be less international trade.
 A second model, commonly used, is a gravity model that assumes that large economies have a greater impact on trade flows than small economies, and that proximity is an important factor influencing trade flows. And another common type is a partial equilibrium model that assesses the impact of a trade policy measure on a given sector and not on the general economy. Partial balance models do not cover connections with other sectors and are therefore useful when the ripple effects are likely to be negligible. However, partial equilibrium models are more transparent than CGE models and it is easier to identify the effects of modified assumptions. Economists have developed a series of sophisticated models to simulate the changes in economic conditions that can be expected from a trade agreement. These models, based on modern economic theories of trade, are useful when trade barriers are quantifiable, although the results are highly sensitive to the assumptions used to define the parameters of the model. In fact, there are, of course, other reasons than trade barriers, why factors of production such as capital or labour cannot cross borders, even if there are no barriers and higher yields could be achieved in other markets. Workers, for example, are reluctant to leave their homes, their family and friends, and investors are reluctant to invest in other markets where they are less familiar.
As a result, even removing all state-imposed barriers to capital and labour trade would not lead to full compensation for costs between counties. Yi notes that tariff reductions in these global supply chains have a much greater impact than on traditional trade. Suppose, for example, that China, Bangladesh and the United States each reduce their tariffs by 1% and that imported substances and buttons account for half of the cost of the China-made suit; the cost of manufacturing the suit in China will then be reduced by 0.5 percent.