Various theories of international trade. Theories of International Trade 2022-10-28
Various theories of international trade Rating:
International trade is the exchange of goods and services between countries. It plays a significant role in the global economy, as countries rely on each other for the production and consumption of a wide range of products and services. Over the years, various theories have been developed to explain the patterns and determinants of international trade. In this essay, we will discuss some of the most important theories of international trade, including the comparative advantage theory, the Heckscher-Ohlin theory, the new trade theory, and the gravity model.
The comparative advantage theory, developed by economist David Ricardo in the early 19th century, is perhaps the most well-known theory of international trade. It states that countries should specialize in the production of goods and services in which they have a comparative advantage, meaning they can produce them at a lower cost than other countries. This is because, according to the theory, countries can benefit from trade by exporting goods and services in which they have a comparative advantage and importing those in which they do not.
The Heckscher-Ohlin theory, developed by economists Eli Heckscher and Bertil Ohlin in the early 20th century, builds on the comparative advantage theory by taking into account the factor endowments of countries. It argues that countries will tend to export goods and services that are intensive in the factors of production in which they are relatively abundant, and import those that are intensive in the factors of production in which they are relatively scarce. For example, a country with abundant land and labor may have a comparative advantage in the production of agricultural goods, while a country with abundant capital may have a comparative advantage in the production of manufactured goods.
The new trade theory, which emerged in the 1970s and 1980s, focuses on the role of technological differences and increasing returns to scale in international trade. It argues that trade can occur even when countries have similar factor endowments, as long as they have different technologies or production processes. For example, a country with advanced technology in the production of computer chips may have a comparative advantage in the export of computers, even if it has similar factor endowments to a country without this technology.
The gravity model, developed in the 1950s, is a statistical model that seeks to explain the patterns of international trade based on the size and distance between countries. It predicts that trade between two countries is proportional to the size of their economies and inversely proportional to the distance between them. In other words, countries with larger economies tend to have more trade with each other, and trade tends to decrease as the distance between countries increases.
In conclusion, various theories of international trade have been developed over the years to explain the patterns and determinants of trade between countries. These theories, including the comparative advantage theory, the Heckscher-Ohlin theory, the new trade theory, and the gravity model, each offer unique insights into the drivers of international trade and can be used to inform trade policy and decision-making.
2.2: What Is International Trade Theory?
Other advanced countries, too, commerce their production at time t1 only continue to be net importers. This means that per unit cost reductions occur because of experience in producing a particular good. Taxpayers pay for government subsidies of select exports in the form of higher taxes. The country possesses the income to purchase the product in its new-product stage, in which it was relatively high priced. Factor Condition — Factors available like labour, capital, land, etc 2.
Theories of International Trade are the theories that explain international trade practices. China should specialize in the production of cloth and import wheat from India. A similar case applies if country B stands out as a better producer of a given product as it would need to focus and specialize on its strengths. Therefore, the Country Aadi will specialise in the production of PLASTIC and country Bhadra in the production of TEXTILE and will trade with each other. However, it helps to explain one of the drawbacks of the theory of the Absolute difference. Later on, when demand for the product grows country will undertake foreign direct investment in other countries and open several manufacturing plants to meet the request. Now coming to the aspect of product differentiation it may be observed from Table 1 that product differentiation has two possible types: vertical and horizontal.
Theories of International Trade: Types, Classical, Modern, Example
Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. These trade theories attempt to answer the questions like why business takes place among nations and what determines the pattern of international trade? Hence these countries have become the optimal locations for labor-intensive industries like textiles and garments. The following table 2. But in terms of efficiency, the total labour may be larger. Mercantilism This theory flourished during the 1500s as there was a rise in the new nation-states.
Are you ready for UPSC Exam? During that time the wealth of the nation only consisted of gold or other kinds of precious metals so the theorists suggested that the countries should start accumulating gold and other kinds of metals more and more. For example, China and India are home to cheap, large pools of labor. This fact has led to the emphasis on another theory of trade, developed by Paul Krugman and others. On the other hand, if the resource-cost of producing telecommunication equipment is higher than other goods in India, it will import equipment. It advocates the formulation of trade policies, in this regard, that protect the domestic countries. Moreover, it takes time to purchase inputs, install equipment, process the inputs, bring the finished product to market, and so on. They determined that the cost of any factor or resource was a function of supply and demand.
The PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. He said that a country should only produce those products in which they have an absolute advantage. He perceived these advanced factors as providing a country with a sustainable competitive advantage. But the modern theory of international trade explains the causes for such comparative cost difference. Productivity may be the outcome of techno-managerial practices, but eventually is the result of a mindset.
There is perfect competition in both product and factor markets in both the countries. These exceptions to the rule may be elaborated: 1. PORTER argued that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge base, government support, and culture. This section has sought to highlight the basics of international trade theory to enable you to understand the realities that face global businesses. It also has extensive access to capital. While at the surface, this many sound very simple, there is a great deal of theory, policy, and business strategy that constitutes international trade. Finally, these models indicate the difficulty of predicting future trade patterns but suggest potentially large gains from trade.
Comparative advantage is one of the most important theories alongside absolute advantage. These advantages in the factors of production have helped the United States become the largest and richest economy in the world. Your analysis should be based on the theories explained. Ignores price differences, transport costs, economies of scale, external economies, etc. That the choice of the product that can prove itself to be of great advantage is led by free and open markets. People or entities trade because they believe that they benefit from the exchange. The Linder theory asserts that tastes of consumers are strongly influenced by their income levels; the per capita income level of a country will yield a particular pattern of tastes.
8 Theories of International Trade: Explained, PPT Available
Regions and countries differ from one another in respect of the availability of resources. Consumers consider future tax payments when deciding how much to spend and save today. The Marxist revival is not exclusive to current and former communist nations; The 2017 Marxism Festival was hosted by the Socialist Workers Party in London and attracted thousands of activists from across the world. So this will be beneficial for both countries. Modern Theory of International Trade Introduction The modern theory of international trade was developed by Swedish economist Eli Heckscher and his student Bertil Ohlin in 1919. Rice was instrumental in starting the One Woman Initiative, which provides access to legal rights, political participation, and economic development to women living in countries with a large Muslim population.