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International Trade Theories Are Various Theories That Analyze and Explain

International trade theories analyze and explain patterns of international trade by describing how and why countries exchange goods and services. Early theories developed by Adam Smith, David Ricardo, and others viewed trade through a country-based lens. Later theories developed in the mid-20th century shifted to a firm-based perspective to understand trade between companies. Understanding different trade theories helps explain how trade has evolved over time and which perspectives are most relevant today.

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113 views4 pages

International Trade Theories Are Various Theories That Analyze and Explain

International trade theories analyze and explain patterns of international trade by describing how and why countries exchange goods and services. Early theories developed by Adam Smith, David Ricardo, and others viewed trade through a country-based lens. Later theories developed in the mid-20th century shifted to a firm-based perspective to understand trade between companies. Understanding different trade theories helps explain how trade has evolved over time and which perspectives are most relevant today.

Uploaded by

RM Valencia
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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International Trade Theories

International trade theories are various theories that analyze and explain
the patterns of international trade. These theories explain the mechanism
of international trade that is how countries exchange goods and services
with each other.

International trade refers to the trade that places across national borders. It


is the means through which countries exchange goods with each other and
is served as an important means of survival for many countries. Various
countries that have limited resources depend on other countries to fulfilling
their needs.
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. Initially, economists
developed international trade theories on the basis of the country which
were termed as classical theories. However, these theories, later on,
shifted from country-based to firm or company based by the mid-twentieth
century which was termed as modern theories.
International Trade Theories
International Trade Theories:

Absolute Advantage Theory


Absolute advantage theory was proposed by Scottish social scientist Adam
smith in 1776. This theory says that countries should focus on producing
such products that they can produce efficiently at a lower cost as compared
to other countries. Manufacturing a product in which a particular country
specializes is quite advantageous for them. Countries should produce and
export such products which can produce efficiently and import those goods
that they produce relatively less efficiently. This kind of trade will be
beneficial for both countries.
Comparative Advantage Theory
David Ricardo in 1817 has given the comparative advantage theory.
According to this theory, If a country cannot produce goods more efficiently
than other countries then it should only produce such goods in which it is
most efficient. Countries should specialize and export such products in
which it has a less absolute disadvantage as compared to other products. 

Heckscher-Ohlin Theory
Heckscher-Ohlin theory of international trade was given by Eli Heckscher
and Bertil Ohlin. It is also called as factors proportions theory and states
that the country will produce and export those products whose production
require those factories which are in great supply in-country and have low
manufacturing cost. Whereas it will import all such goods whose production
requires nation’s scarce and expensive factors and have high demand.
According to this theory, trade patterns are recognized by factor
endowment rather than productivity. The cost of any factor or resource is
simply the function of demand and supply.

Mercantilism Theory
It is one of the oldest international trade theory which was developed in
1630. Mercantilism theory states that nation’s wealth is determined by its
gold and silver holdings. Every nation in order to increase its economic
strength should increase its gold and silver accumulation. It says that
nations should favor export which leads to inflow of gold whereas they
should disfavor import which lead to the outflow of gold. Mercantilism
theory focuses on creating a trade surplus that is more exports than
imports which will contribute to the accumulation of the nation’s wealth.
Product Life Cycle Theory
Product life cycle theory was developed in 1970 by Raymond Vernon, a
Harvard Business School professor. It says that initially new products will
be produced and exported from the home country of its innovation. Later
on, when demand for the product grows country will undertake foreign
direct investment in other countries and open several manufacturing plants
to meet the request. Both locations of production and sales of product
changes along with its life cycle or as product get matured.

National Competitive Advantage Theory


It was developed in 1990 by Harvard business school professor, Michael
porter. This theory state that national competitiveness in a particular
industry will depend upon the environment that such industry is getting in
the home country. The main source of innovation and up-gradation for such
industry is basically the environment in which they operate which helps
countries in getting a national competitive advantage. Porter determined
four factors as determinants of national competitive advantage of the
nation. Local market resources and capabilities, Local market demand,
Local suppliers and complementary industries and characteristics of local
firms. 

International Trade Theory

LEARNING OBJECTIVES

1. Understand international trade.


2. Compare and contrast different trade theories.
3. Determine which international trade theory is most relevant today
and how it continues to evolve.

International trade theories are simply different theories to explain


international trade. Trade is the concept of exchanging goods and services
between two people or entities. International trade is then the concept of
this exchange between people or entities in two different countries.

People or entities trade because they believe that they benefit from the
exchange. They may need or want the goods or services. While at the
surface, this many sound very simple, there is a great deal of theory, policy,
and business strategy that constitutes international trade.

In this section, you’ll learn about the different trade theories that have
evolved over the past century and which are most relevant today.
Additionally, you’ll explore the factors that impact international trade and
how businesses and governments use these factors to their respective
benefits to promote their interests.

To better understand how modern global trade has evolved, it’s important
to understand how countries traded with one another historically. Over
time, economists have developed theories to explain the mechanisms of
global trade. The main historical theories are called classical and are from
the perspective of a country, or country-based. By the mid-twentieth
century, the theories began to shift to explain trade from a firm, rather than
a country, perspective. These theories are referred to as modern and are
firm-based or company-based. Both of these categories, classical and
modern, consist of several international theories.

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