Question

Explore changes to trade theories over time. Use examples of early trade theories, later trade theories and more current approaches to trade theory in your discussion.

Answer 1

We define international trade theories as theories that guide international trade. Trade is basically exchange of foods and services. When this take place between border, countries, it becomes international trade.

From the beginning of time international trade has been taking places and the theories that have guided it have changed based on the need of the hour.

They are broadly.

Classical-country based theories

Modern firm-based theories.

All trade theories fall in either of the 2 categories.

These theories are:

1. Mercantile

2. Absolute Advantage

3. Comparative Advantage

4. Heckscher-Ohlin(H-O) theory

These theories focused on increasing export and decreasing imports

Mercantile:

a. The 1st trade policy

b. Based on reserves of gold and silver

c. Major focus was on attaining gold in a country.

d. Focused on increasing export to gain gold in return and reduce import so as to reduce the loss of gold.

             Absolute Advantage:

a. Stated by Adam smith in his book Wealth of nations

b. He was against government intervention in trade

c. Theory introduces specialization

d. Focused on market forces driving the trade

e. Country that had an advantage in producing a product should specialization

Comparative Advantage

a. Given by David Recardo.

b. The theory was created as an answer to the situation where a country has an advantage in producing both the goods and country B had a disadvantage in producing both the goods.

c. Here Country B was expected to produce the good that is was comparatively better.

d. Eg. one unit of labour produces 10 units of wine and 7 units of rice, country B should manufacture Wine and trade it for rice.

H-O theory

a. Given by Eli Heckscher and Bertil Ohlin.

b. Introduced the concept of factor proportions.

c. Focus was that country should produce the product that was heavily dependent on the product that used more of the abundant factor of production.

d. Labour abundant country to produce Labour intensive good and capital intensive country to produce capital intensive good.

e. Leontief paradox was related to this theory.

Modern theories developed after WW2. These were based on the growth of MNC and Intra industry trade.

These theories are

1. Country Similarity Theory:

a. Proposed by Steffan Linder in 1961

b. Focused on intra industry trade.

c. The focus is on trade between counters that are similar is growth since they have similar PCI, preferences and industries.

d. The theory states that trade is most beneficial when it take space between similar countries.

2. Product life cycle theory

a. Proposed by Raymond Vernon in 1960s.

b. The theory states that a new product is developed and manufacture at the place where its idea was 1st generated.

c. This is not applicable for today since one single product is developed in parts around the globe.

3. Global Strategic Rivalry theory:

a. Based on Paul Krugmen and Kelvin Lancaster’s work.

b. Theory focused on MNC and their need to have comparative advantage. Focus was to create barriers for new firm through these advantages.

4. Porter’s National Competitive Advantage Theory:

a. Given by Michael Porter.

b. States that the development of an industry is based on its capacity to innovate \.

c. 4 aspects of the theory are Local Firm Characteristics, Local Market Resources and capacities, Local Market Demand and Local Suppliers and complimentary industries.