Theories of International Trade
Theories of International Trade
Exchange of goods across the national borders
Fundamental principals for international trade and shiftingtrade patterns
Why do nation trade with each other?
Is trading is zero sum game or a mutually beneficial activity?
Why do trade pattern among countries exhibit widevariations?
Can government policies influences trade pattern?
Theory of Mercantilism
Wealth of nation measured by size of its accumulated treasuremeasured in terms of Gold
Encouraging exports and discouraging imports : tradesurplus
Use of trade surplus to build powerful army andinfrastructure
Exploitation of resources by colonial power
Active government intervention
Win-loose game, zero sum game
Not beneficial in the long run
Theory of Absolute Advantage
Adam Smith
The standard of living of a country can be improved either byimporting goods not produced by it or by producing largequantities of goods through specialization and exporting thesurplus
Absolute advantage refers to the ability of a country toproduce goods more efficiently and cost-effective than anyother country
Natural Advantages
Acquired advantages
UK
India
Tea
10
5
Rice
4
10
Total Resource Available : 100 Units with each country
Resource Allocation: 50:50 for each product
Gains from Trade
Without Trade
With Trade
UK
India
Total
UK
India
Total
Tea
5
10
15
0
20
20
Rice
12.5
5
17.5
25
0
25
32.5
45
Theory of Comparative Advantage
David Ricardo
Country benefit from international trade even if it is lessefficient that other nations in the production of twocommodities.
Country should specialize in the production and export ofcommodity in which absolute disadvantage is less than that ofanother commodity
UK
India
Tea
10
5
Rice
5
4
Total Resource Available : 100 Units with each country
Resource Allocation: 50:50 for each product
Comparative Cost Advantage
product
Without Trade
With Trade(Increasing the Riseproduction)
With Trade(Increasing the Teaproduction)
UK
India
Total
UK
India
Total
UK
India
Total
Tea
5
10
15
0
15
15
0
18
18
Rice
10
12.5
22.5
20
6.25
26.5
20
2.5
22.5
37.5
20
41.25
40.5
Factor Endowment Theory
Hecksher Ohlin
Reasons for difference in commodity prices and comparativeadvantage between nations
Nation will export the commodity whose production requireintensive use of nation’s relatively abundance and cheapfactor and import the commodity whose production requireintensive use of nation’s scarce resource
Leontief Paradox
Country Similarity Theory
Staffan B Linder
Trade pattern for primary product and manufacturingproducts
In the case of manufacturing products trade pattern based ondemand across countries rather than production cost offactor endowment
Majority of trade occurs between countries having similarcharacteristics
The New Trade Theory
Concept of economies of scale to solve Leontief Paradox
Internal economies of scale
External economies of scale
International Product Life Cycle Theory
Introduction
Growth
Maturity
Decline
