Question

Project One of International Trade Course:
Summarize or compare all the theories we have learned in this course or just choose some theories you are interested in to summarize or compare. Your summarization or comparison should cover at least the following aspects: trade basis, trade patterns and the distribution of trade benefits.

Answer 1

International trade is the trade of goods and services across borders of countries. With the coming of globalisation and better transport and communication, the trade between the countries have expanded. There have been several trade theories related to international trade, from mercantilism to Ricardo's comparative advantage.

Given below are few of the important theories of the international trade:

a) Mercantilism: This theory was more prominent in the sixteenth century when a group of merchants or traders controlled the trade. Their aim was to maximise exports, accumulate more and more gold, which was a currency in those times and reduce their imports as much as possible. This led to control over the importing nations, which often became the colonies of these trading nations.

But this theory failed when more exports caused the prices to rise and hence inflation and the imports therefore were responsible for reduction in the prices.

b) Absolute advantage: In 1776, Adam Smith presented the theory of absolute advantage, which meant the production of more goods and services with the same input. This meant that the country which was able to produce more certainly had more efficiency and hence absolute advantage.

In this, unlike merchantilism, there is a positive sum game and the trade benefits the countries.

But this theory was questioned, when a country had absolute advantage in both the goods and the other one had in none.

c) Comparative theory: This is when David Ricardo introduced the concept of comparative advantage around 1817. He emphasised on the fact that the countries can trade based on the opportunity cost of the goods they produce. Even if one of the country has absolute advantage in production of both the goods, only one country would have less opportunity cost or comparative advantage in production of that good and hence these two countries can specialise and trade can take place between two countries, benefitting both the countries and increasing the production of the goods.

This also has several drawbacks like the transportation cost is ignored and the assumption that each economy has only two goods or the constant returns to scale.

d) Heckscher Ohlin Model: In this model, the countries have comparative advantage in the goods which are abundant in supply in the domestic country and hence these countries tend to export the good in which they have abundance of resources.

e) Product life cycle theory: In this theory , there is change in the pattern of trade. First, an economy is importing a good from another country. Then the importing nation would start the production of the good in the domestic country and once it gains specialisation, it would enter the market and start exporting the good, driving other countries out of the market. Hence the pattern of trade changes from import to export in this case.

f) New trade theory: This is one of the recent trade theories. In this the trade takes place, even when the resources and level of technologies in the countries is the same. This is so that the consumers have a variety of goods. This is mostly seen in computers, mobile phones ie electronics between countries like Japan, America etc. these countries trade, even when they have similar level of goods such that the consumers have more than one brand to choose from.

Hence these are some of the theories of the international trade.

(You can comment for doubts)