Various theories of international trade. Theories Justifying International Trade 2022-10-28
Various theories of international trade Rating:
International trade refers to the exchange of goods and services between countries. There are various theories that attempt to explain the patterns and drivers of international trade. Some of the most well-known theories are discussed below.
The theory of comparative advantage, developed by economist David Ricardo in the early 19th century, suggests that countries should specialize in the production of goods and services in which they have a relative cost advantage and trade with other countries to obtain the goods and services they need. This theory is based on the idea that each country has different resources, technologies, and production costs, and therefore some countries are better suited to produce certain goods and services than others. According to this theory, international trade leads to efficiency and prosperity because it allows countries to specialize in what they are good at and trade with others to obtain the goods and services they need, rather than trying to produce everything themselves.
The theory of absolute advantage, also developed in the 19th century, suggests that countries should specialize in the production of goods and services in which they have an absolute advantage, meaning they can produce them more efficiently or at a lower cost than other countries. This theory is based on the idea that some countries have superior resources, technologies, or production methods, and therefore are able to produce goods and services more efficiently than other countries. According to this theory, international trade leads to efficiency and prosperity because it allows countries to specialize in what they are good at and trade with others to obtain the goods and services they need, rather than trying to produce everything themselves.
The theory of Heckscher-Ohlin, developed in the early 20th century, suggests that international trade is driven by differences in the relative abundance of certain factors of production, such as labor, capital, and natural resources. According to this theory, countries with a relative abundance of labor will tend to specialize in the production of labor-intensive goods, while countries with a relative abundance of capital will tend to specialize in the production of capital-intensive goods. This theory is based on the idea that countries with a comparative advantage in the production of certain goods will tend to export those goods and import others.
The theory of new trade, developed in the late 20th century, suggests that international trade is driven by technological advances and the creation of new products. According to this theory, countries that are at the forefront of technological innovation will tend to export new and innovative products, while countries that are less technologically advanced will tend to import these products. This theory is based on the idea that technological innovation creates new opportunities for trade and drives economic growth.
Key Theories of International Relations
In this stage, some general standards for the product and its characteristics begin to crop up and mass production techniques are adopted. International trade theories are simply different theories to explain international trade. The equation written above has immense significance in the context of the accrual of internal economies of scale. As the global population continues to grow and sustainability becomes increasingly precarious, Marxism remains a relevant topic of discussion for those who advocate the prioritization of human needs over private profit. This theory is an improvement over the classical theory.
Honestly saying, apart from making your syllabus boring, these theories can be of great assist in the long run. One needs to take note of the fact that in doing so, theorists borrowed heavily from industrial economics. He said that a country should only produce those products in which they have an absolute advantage. The contributions of nations such as Iceland have been financially and socially impactful, addressing the need for true gender equality and demonstrating the positive effects of feminism in domestic and foreign policy. Also, the rulers of these states wanted to strengthen their nations. According to Ricardo, there are still high chances of trade and specialization to take place between the two nations even if country A enjoyed the absolute advantage of producing both products. .
Theories of International Trade: Types, Classical, Modern, Example
Illustration Absolute cost advantage theory can be illustrated with the help of the following example. 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. But there are some positives to be drawn as well. Her productivity and income will be highest if she specializes in the higher-paid legal services and hires the most qualified administrative assistant, who can type fast, although a little slower than Miranda. No change in technology. Manufacturing a product in which a particular country specializes is quite advantageous for them.
To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. In monopolistic competition, there are many firms in the industry and easy entry and exit. Trade as an Engine of Growth A rise in trade can help a nation grow and bloom into a better economy that serves its people and the trade. The following table 2. Thus, Smith stated that there is no need for judging the wealth of any nation based on how much silver and gold it possessed previously. According to Ricardo, each nation should focus in the production of those goods that yield the most. The firm-based theories evolved with the growth of the multinational company MNC.
Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. They help create additional value for the customers and thereby, help a company in becoming more competitive internationally. Abundance of such factors may actually undermine competitive advantage! Now, rather take higher time in producing Coffee, Country A will prefer to import it and likewise, Country B will find it profitable to import tea rather than producing it at a higher time and cost in their own country. Suggested Theory to gain dynamism and competitiveness in Operation A. A comparative advantage aims at the differences between the relative productivity of the two nations, while absolute advantage focuses on absolute productivity Chacholiades, 2017. . When leveraged properly, these theories can be used to accomplish a broad array of objectives; therefore, international relations professionals must possess a keen understanding of the specific impact each theoretical approach to international relations can have on global diplomatic efforts.
A strong union, for example, may have the power to force higher wages on some firms. For this, they start selling the product at record low prices. For this, it is necessary to gain a clear knowledge of international business or trade theories. Loyd have mentioned several reasons for the occurrence of intra-industry trade IIT , of which few are mentioned below: i Product Differentiation: The chief reason behind the existence of a variety of products is that producers try to convert their ordinary products into brand royalty products. As a senator representing the state of New York, Clinton co-sponsored the Lilly Ledbetter Fair Pay Act of 2009, which was aimed at combatting gender-based pay discrimination.
7 Main Theories of International Trade (Explained)
Classical Theory of International Trade 2. This theory says that the basis for international trade is the difference in factor endowments. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries. International organizations play a role in promoting human rights and making them an international standard to which countries are expected to conform. Moreover, there is zero profit for each firm in the long run. As the sales would increase, the corporations would start to export the goods to different nations in order to increase the revenue and sales.
Compare this case with the case given at the beginning of this chapter. The theory, detailed that a product goes through various stages in the course of its progress. As the export of good PLASTIC from country Aadi enters country Bhadra, the supply of goods PLASTIC in country Bhadra increases and its price falls. Because these 5 factors can hardly be influenced, this fits in a rather passive inherited view regarding national economic opportunity. So with increased efficiencies, people in both countries would benefit and trade should be encouraged.
In practice, governments and companies use a combination of these theories to both interpret trends and develop strategy. The thinking behind this concept is evident. Countries should produce and export such Comparative Advantage Theory David Ricardo in 1817 has given the comparative advantage theory. All said and done about the production patterns we may now focus the spotlight on the important question pertaining to prospects of trade between the two countries. Herbert Grubel and P. The opposite will befall in a labor abundant country — wages will be relatively low and the cost of the labor-intensive products will be relatively low. 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.