Theories of International Trade

Theories of International TradeTheories of International TradeExchange of goods across the national bordersFundamental principals for international trade and shifting trade patternsWhy do nation trade with each other?Is trading is zero sum game or a mutually beneficial activity?Why do trade pattern among countries exhibit wide variations?Can government policies influences trade pattern?

Theory of MercantilismWealth of nation measured by size of its accumulated treasure measured in terms of GoldEncouraging exports and discouraging imports : trade surplus Use of trade surplus to build powerful army and infrastructureExploitation of resources by colonial powerActive government interventionWin-loose game, zero sum gameNot beneficial in the long run

Theory of Absolute AdvantageAdam SmithThe standard of living of a country can be improved either by importing goods not produced by it or by producing large quantities of goods through specialization and exporting the surplusAbsolute advantage refers to the ability of a country to produce goods more efficiently and cost-effective than any other countryNatural AdvantagesAcquired advantages

UKIndiaTea105Rice410Total Resource Available : 100 Units with each countryResource Allocation: 50:50 for each productGains from TradeWithout TradeWith TradeUKIndiaTotalUKIndiaTotalTea5101502020Rice12.5517.52502532.545Theory of Comparative AdvantageDavid RicardoCountry benefit from international trade even if it is less efficient that other nations in the production of two commodities.Country should specialize in the production and export of commodity in which absolute disadvantage is less than that of another commodity

UKIndiaTea105Rice54Total Resource Available : 100 Units with each countryResource Allocation: 50:50 for each productComparative Cost AdvantageproductWithout TradeWith Trade (Increasing the Rise production)With Trade (Increasing the Tea production)UKIndiaTotalUKIndiaTotalUKIndiaTotalTea510150151501818Rice1012.522.5206.2526.5202.522.537.52041.2540.5Factor Endowment TheoryHecksher OhlinReasons for difference in commodity prices and comparative advantage between nationsNation will export the commodity whose production require intensive use of nations relatively abundance and cheap factor and import the commodity whose production require intensive use of nations scarce resourceLeontief Paradox

Country Similarity Theory Staffan B LinderTrade pattern for primary product and manufacturing productsIn the case of manufacturing products trade pattern based on demand across countries rather than production cost of factor endowmentMajority of trade occurs between countries having similar characteristics

The New Trade TheoryConcept of economies of scale to solve Leontief ParadoxInternal economies of scale External economies of scale

International Product Life Cycle Theory IntroductionGrowthMaturityDecline

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