Question

What are the leading theories of international trade?

Answer 1

International trade
Exchange of capital, goods and services across the world is called as international trade.
International trade allows consumers and countries the opportunity to get goods and services which are not available in their country.

Theories related to international trade

Trade theories provides an insight into the potential product portfolio and trade patterns. They also helps in understanding the basic reasons behind the evolution of a country as a supply base or market for specific commodities.

• Theory of Mercantilism of international trade

This theory was developed in 16th century. The theory of mercantilism measures the wealth of country by the size of it's accumulated treasures. Traditionally accumulated wealth is measured in terms of gold and silver. Gold and silver where considered as the currency of international trade.
This theory focuses on making trade surplus, which in turn contributes to the the accumulation of nations
wealth.

• Theory of absolute advantage of International Trade

Adam Smith critically examine mercantilist trade of international trade in his book an enquiry into the nature and causes of wealth of nations.
According to Smith and absolute advantage refers to the ability of a nation to produce a commodity more efficiently and cost effectively than other nation.

Such efficiency can be gained through:

• Repetitive production of same commodity, helps to increase the skill and knowledge of workforce in doing particular job.
• Long product runs to supply incentive to develop more practical work strategies over a period of time.

• Theory of comparative advantage of international theory

David Ricardo developed the classical theory of comparative advantage in 1817 to elucidate why countries interact in international trade even when one country's workers are more efficient at producing every single good than workers in other countries.

• Factor endowment theory of International Trade.

The Hecksher-Ohlin theory of factor endowment in international trade is used to measure comparative advantage of various countries. This theory states that, a country will have a comparative advantage in a good produced by factors it is abundantly endowed with.
A nation have an abundance of cheap labour would export labour intensive commodites and import capital intensive goods and vice versa. This theory suggest that patterns of trade are determined by factor endowment rather than productivity.

• Country similarity theory of International Trade
According to this theory Indra industry trade occurs between the countries with same level of development.
Country similarity theory developed by Swedish economist Steffan Linder suggest that International trade of manufactured commodity take place between countries at the same stage of development.
In this theory Linders suggest that companies should focus more on producing goods for domestic consumption. Trade with countries having similar capita income and intra industry trade will be common.

• New trade theory of International Trade
New trade theory of trade explains trade pattern when markets are not perfectly competitive or when the economy of scale are achieved by the production of specific products.

• International Product life cycle theory of International Theory
The International Product Life Cycle Theory developed by Raymond Vernon in the 1960s to explain the cycle that products go through different life cycle in international market. This theory explains how a product matures and declines as a process of internationalisation. A product go through three different phases are:
1 New Product Introduction
2 The Maturity Stage
3 Product Standardization and Streamlining of Manufacturing

• Theory of competitive advantage of International Trade
Theory of competitive advantage focus on a firm's home country environment as the main source of competencies and innovation.

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