New trade theory of international trade. New Trade Theory of International Trade 2022-10-27
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The New Trade Theory is a school of economic thought that challenges the traditional explanation of international trade, known as the Heckscher-Ohlin (HO) theory. The HO theory, also called the factor proportions theory, suggests that countries trade with each other based on their relative abundance or scarcity of certain factors of production, such as labor and capital. According to the HO theory, countries with a surplus of labor will export labor-intensive products, while countries with a surplus of capital will export capital-intensive products.
However, the New Trade Theory challenges this explanation, arguing that it does not fully account for the patterns of international trade that we observe in the real world. The New Trade Theory suggests that other factors, such as economies of scale and technological differences, play a more significant role in determining what countries trade with each other.
One key concept in the New Trade Theory is the idea of increasing returns to scale, which refers to the phenomenon where the average cost of production decreases as the scale of production increases. This can occur for a variety of reasons, such as the ability to take advantage of economies of scale in production, or the ability to spread the fixed costs of research and development over a larger number of units produced. According to the New Trade Theory, countries with firms that have increasing returns to scale will tend to specialize in producing a narrow range of products, rather than trying to produce a wide range of products as the HO theory would predict.
Another important concept in the New Trade Theory is technological differences between countries. The New Trade Theory suggests that countries with a more advanced level of technology will tend to export products that require a higher level of technology to produce, while countries with a less advanced level of technology will tend to import these products. This is because firms in technologically advanced countries can produce these products more efficiently, resulting in a cost advantage over firms in less technologically advanced countries.
Overall, the New Trade Theory provides a more nuanced explanation of international trade than the traditional HO theory, taking into account the role of increasing returns to scale and technological differences in determining what countries trade with each other. This theory has important implications for policy makers, as it suggests that policies that encourage the development of advanced technology or that help firms to achieve economies of scale can help to promote international trade and economic growth.
Modern Approach to International Trade Theory
ADVERTISEMENTS: These are: i The explanation of intra-industry trade ii The use of non-constant returns to scale. The competition always remains perfect across sectors. If not start, then check your mail inbox. These exceptions to the rule may be elaborated: 1. .
Review of Economic Studies. Ricardo and International Trade. Unlike perfectly competitive set-up, monopoly, and duopoly, the number of firms in monopolistic competition may vary. Answer the following questions to expand your knowledge on this topic. There are many ways that firms can accomplish this, from research and development to economies of scale, and much more. How can a country become a continually successful exporter? It is common sense that all consumers would prefer higher-quality to lower-quality goods. To determine the similarity of countries, the Geert-Hofstede model is another tool that was developed to compare countries.
Theories of International Trade: Types, Classical, Modern, Example
Analysis of New Trade Theory Theories prior to NTT didn't take into account that even trading similar goods can result in a lot of profit for all countries involved. Firms competing in the model of monopolistic competition and heavy branding. International trade theories help countries in deciding what should be imported and what should be exported, in what quantity and with whom trade should be done internationally. The second stage of the life cycle is called the maturing product stage. The wage to price ratio is nothing but the real income of consumers.
It will get subsided by the government, conducts economic rationalization, and may get a monopoly within the industry. Imperfect competition- is a market structure in which elements of monopoly allow producers or consumers to exercise some control over market prices. Prime Factors Thus, the main factors of new trade theory are the following: 1 Economies Of Scale Under this aspect, goods per 2 First-Mover Advantage It attributes to the fact that the earlier a firm gets into producing certain goods, the more economical and strategic benefit it gets over the late entrants. ADVERTISEMENTS: Horizontal differentiation refers to products of the same quality that differ in their real or presumed characteristics. To them the presence of scale economies leads to a breakdown of a perfect competition and creates more efficient firms which continue to expand on the markets because of increased outputs. It says that initially new products will be produced and exported from the home country of its innovation.
In determining international trade patterns, the theory explains that some key factors are through network effects that happen in certain industries and substantial economies of scale. Because of its higher income, it may demand and, therefore, produce goods C, D, E, F, and G. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production i. You are free to use this image on your website, templates, etc. ADVERTISEMENTS: The central point of importance in the imitation lag hypothesis is that trade focuses on new products. This means that per unit cost reductions occur because of experience in producing a particular good. History of Political Economy 34: 727-748.
The technology used in manufacturing remains either fixed or similar technology available to all nations. Sure, we'd have to ease into it gradually, but the internet is already providing a clear venue for that. Melitz and Stephen Ross Yeaple 2004. Empirical tests using the gravity model have till date enjoyed stupendous success. NTT tells us that the result of globalization is that fewer companies are able to produce similar products and compete.
Comparison between Classical Theory and Modern Theory of International Trade
Comparative advantage theory This theory was given by David Ricardo, in 1817. Journal of Economic Perspectives 26 2 : 65-89. This trade does not reflect comparative advantage, but reflects economies of scale. It explains why, even if a good or service is produced in our country, we end up with comparable products from other countries. This is because the first firms gain substantial Monopolistic competition is an important element of New Trade Theory, it suggests that firms are often competing on branding, quality and not just simple price. This theory isn't ultimately against global trade between countries. This means that the most lucrative industries are often dominated in capital-intensive countries, who were the first to develop these industries.
Even though countries may have no particular disadvantage in producing a particular type of good, they may still import this good from another country. ADVERTISEMENTS: ii The commodities which are internationally traded are homogeneous, and identical in the various countries. Even a casual observation of reality shows that: i Market forms different from perfect competition such as monopolistic competition and oligopoly are the norm rather than the exception. The determination of the trading pattern by observing overlapping demands has an important implication for the types of countries that will trade with each other. Click International trade also leads to greater varieties of products being available at home and foreign country. If a country has an advantage in the production of two commodities, then compare the efficiency of both goods. Leaving aside the assumptions specific to each model, the fundamental assumptions of the orthodox theory are: i The market is perfectly competitive.
However, the historical theories of each country are just as important as modern theories; they explain how nations expanded around the globe and built their wealth through trade. For example, we often assume that in an economy everyone has perfect information, but in reality buyers and sellers do not typically have the same knowledge. The most recent arguments in NTT also talk about the importance of firms and companies in industries instead of the entire industry or sector as one unit , allowing for closer analysis of what occurs in an economy. Each firm is given a particular level of productivity, which is then reflected in their marginal cost of production: the more productive a given firm, the lower their marginal cost. NTT also considers a host of factors that traditional theories are not designed to consider, such as market imperfections, which are situations where the assumptions of traditional economics aren't true; strategic trade behaviors, which are any type of behavior or action that has a motive outside of the specific transaction being made; and the political and social implications of economic activity. Product Life Cycle Theory a It is given by Raymond Vernon in Mid 1960s and the Theory consists of technology-based products. An early entrant to the trade has all the say and can create an entry of barriers for new entrants.