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    Theories of International Trade

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    Akshay Bhalla
    There are several theories that seek to explain international trade patterns: 1. Mercantilism held that countries should aim to maximize exports and minimize imports in order to accumulate wealth. 2. Absolute advantage theory proposed by Adam Smith stated that countries should specialize in goods they can produce more efficiently. 3. Comparative advantage theory developed by Ricardo showed that mutual gains from trade can be achieved even if one country is more efficient in all areas, by specializing in areas where efficiency is relatively higher. 4. Heckscher-Ohlin theory attributed comparative advantage to differences in factor endowments like capital and labor across countries.

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    Theories of International Trade

    Uploaded by

    Akshay Bhalla
    43 views20 pages
    There are several theories that seek to explain international trade patterns: 1. Mercantilism held that countries should aim to maximize exports and minimize imports in order to accumulate wealth. 2. Absolute advantage theory proposed by Adam Smith stated that countries should specialize in goods they can produce more efficiently. 3. Comparative advantage theory developed by Ricardo showed that mutual gains from trade can be achieved even if one country is more efficient in all areas, by specializing in areas where efficiency is relatively higher. 4. Heckscher-Ohlin theory attributed comparative advantage to differences in factor endowments like capital and labor across countries.

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    There are several theories that seek to explain international trade patterns: 1. Mercantilism held that countries should aim to maximize exports and minimize imports in order to accumulate wealth. 2. Absolute advantage theory proposed by Adam Smith stated that countries should specialize in goods they can produce more efficiently. 3. Comparative advantage theory developed by Ricardo showed that mutual gains from trade can be achieved even if one country is more efficient in all areas, by specializing in areas where efficiency is relatively higher. 4. Heckscher-Ohlin theory attributed comparative advantage to differences in factor endowments like capital and labor across countries.

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    43 views20 pages

    Theories of International Trade

    Uploaded by

    Akshay Bhalla
    There are several theories that seek to explain international trade patterns: 1. Mercantilism held that countries should aim to maximize exports and minimize imports in order to accumulate wealth. 2. Absolute advantage theory proposed by Adam Smith stated that countries should specialize in goods they can produce more efficiently. 3. Comparative advantage theory developed by Ricardo showed that mutual gains from trade can be achieved even if one country is more efficient in all areas, by specializing in areas where efficiency is relatively higher. 4. Heckscher-Ohlin theory attributed comparative advantage to differences in factor endowments like capital and labor across countries.

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    THEORIES OF INTERNATIONAL TRADE

    Mercantilism (1630 AD)


    The essence of mercantilism was that it

    was in a countrys best interests to maintain a trade surplus, to export more than it imported.

    Increase our wealth and treasure by selling more to outside world than we consume their goods To acliene this, imports to be discouraged by tariffs and quotas and exports to be subsidizedly the government

    Absolute Advantage (ADAM SMITH) 1976


    Countries differ in their ability to pro once goods efficiently. Countries should specialize in the production of a product when it is more efficient than any other country in producing it. As a result of specialization and trade, output of all the goods would increase and consumers in all nations would gain.

    Comparative Advantage (Riscardo, 1817)


    According to Ricardos Theory of comparative advantage, it marks a sense for a country to specialize in the production, of those if produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.

    The basic message of theory of comparative advantage is that potential world production is greater with unrestricted free trade than it is with restricted trade.

    Trade is a positive sum game in which all countries that participate realize economic gains. Ricardo stressed that comparative advantage arises from difference in productivity and essentially differences in labour productivity between nations.

    Heckscher-Ohlin Theory (1993)


    They argued that comparative advantage arises from differences in national factor endowments i.e. the extent to which a country is endowed with such resources as land, labour and capital.

    Nations have varying factor endowment and different factor endowments translate themselves in differences in factor costs. The more abundant a factor, lower would be its cost.

    This theory predicts that countries will export these goods that make intensive use of factor that are locally abundant and importing those goods that make intensive use of factors that are locally scarce.

    This thoery argues that the pattern of international trade is determined by differences in factor endowments, rather than differences in productivity.

    Product Cycle Theory


    Product have a life cycle ranging form new products to maturing products and standardized products.

    Most new products in the initial stage on nonprice factors and is limited to high income economies. Prodution of new products confined to the nation known for innovation and technology.

    Overtime, demand for new product grows in other advance economics. Foreign producers begin production for their home markets, affecting the potential of exports from the country where original innovation and production commenced.

    As the product becomes more popular and demand further grows, the product becomes more standardized and price becomes the main competitive weapon. Product centers shift to placed where labour costs are lowest. In this stage, importers of this product begins to export it to nations from whom it has been importing so far.

    How U.S.A. has become importer of Xerox machines which it was exporting to developed world in 1960s. Think of Laptop, Computers. Who is the major exporter to-day.

    NEW TRADE THEORY (1970s)


    Each nation may be able to specialize in producing a narrower range of products than it would in the absence of trade, yet by buying goods that it does not produce at home and prefer to buy from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the cost of these goods.

    It happens because of increasing returns to specialization. Economies of scale is at the root of increasing returns and falling costs. This may result in a few countries and a few firms in dominating the world markets for a specific product.

    NATIONAL COMPETITIVE ADVANTAGE (M PORTERS, 1990s)


    Why a nation achieves International success in a particular industry? - Japan in Automobile - Switzerland in precision instrument and pharmaceuticals

    Determination of National Comparative Advantage: Factor Endowments Demand conditions at home Related and supporting industries Firm strategy, structure and rivalry

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