What are the theories of international trade?
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Before fully developed financial systems, there was little international credit. Therefore, a current-account surplus was not matched by net capital outflow (net loans or investment overseas); rather, it was matched by a net inflow of gold to pay for the excess of goods exported from the country. Some of this gold found its way to overseas investment by the sovereign.
Political and economic liberalism found their expression in Smith's argument that the wealth of nations depends upon the goods and services available to their citizens, rather than the gold reserves held by the sovereign. Maximizing this availability depends, first, on putting all resources to use, and then, on the ability --
- labor training and specialization; - long "runs" of one product. The consequent trade policy is relatively free trade, so that a country should import goods that would be produced more expensively internally, where expense is measured according to the labor theory of value.
Example: resources required per unit output:
How are the gains from trade divided between two trading partners? If xi refers to the domestic cost of producing x (a or b) within country i, and Ci/Cj refers to the exchange rate between currencies i and j (how many units of Currency i equals one unit of Currency j), then:
US beef costs $10 in the US� Without a common numeraire (such as labor-value), we don't know the absolute advantages. However, the relative values within the two countries, 1/2 and 5/1, tells us that the US comparative advantage is beef and the Japanese comparative advantage is cameras. Why? Because if costs are accurately measured, then the opportunity costs of beef (in terms of cameras foregone, since there are only two possible products) are lower in the US than in Japan: 1/2 a camera foregone in the US; 5 cameras foregone in Japan. � Despite this clear comparative advantage, trade will only occur if 10/5000 < $/� < 20/1000, which is the same as 0.002 < $/� < 0.02, which is the same as 1/500 < $/� < 1/50. Q: What would make the dollar fall so much against the yen that a dollar would buy fewer than 50 yen,
and this bilateral trade would end? (That is, in a world where neither currency was used for other international purposes, and where there was no monetary policy). This relative demand for products from trading partners, expressed via its effect on exchange rates, determines the division of gains from trade.
Simplified, country 1's gains from trade = G1 = (A1/B2)(C2/C1) - a1/b1
As you think about this, and view the graphs in the textbook (Figs. 6.2 and 6.3), you'll recognize that we're making some assumptions:
These are all problems with using traditional trade theory to understand and to prescribe trade flows in the current economy.
What explains the differences in opportunity costs for producing the same product in different countries? Possibilities include skill or technology (including a preference for producing in different ways), availability of materials or resources, or the pricing of inputs. Assuming: � "A
country has a comparative advantage in the production of goods that use relatively large amounts of its abundant factors of production and a comparative disadvantage in the production of goods that use relatively large amounts of its scarce factors of production." Goods trade can be considered the indirect trade of factor services [Root, p.69]. Complications: The principles of comparative advantage and factor proportions form the basis of the traditional, neoclassical theory of international trade. Note that this is a normative theory, in that it asks the question "If we had a goal of maximizing world production (the goods and services available to citizens of each country), how would we proceed?" If we assume that
Using data available from the 1947 input-output (I-O) model of the US economy, Leontief calculated the capital and labor requirements for the production of $1 million of US exports and $1
million of US production in import-competing industries. He found that
Why is this a paradox?
Possible explanations of the Leontief paradox (see a similar expositionby E.K. Choi) Focus on the boldfaced explanations 1. The US was not really capital-abundant and labor-scarce. Perhaps all the troops returning from World War II flooded the labor market. [It turns out that this is not a good explanation.] 2. The principle of factor proportions is wrong. [This would be so upsetting to trade theory that economists searched for other explanations. See explanation 3.] 3. US sectors that faced import competition became more capital-intensive than the competing imports. This makes sense -- if you're a manufacturer in the US, and you have to compete with imports, you'd start using more sophisticated equipment and fewer workers, because your workers are probably more expensive than your foreign competitors' workers.) Notice that Leontief did not have data on how these imports were produced overseas: he had data on how these sectors operated in the US. Perhaps these sectors were actually labor-intensive in the countries that were exporting to the US. [This is indeed a partial explanation of the paradox. HOWEVER, this suggests that the same product can be made in different ways. If THAT'S the case, how can you have a principle of factor proportions -- which relies on an assumption that some products are labor-intensive (everywhere), some products are capital-intensive (everywhere), and some are land-or resource-intensive (everywhere). 4. There are different kinds of labor, and each should be considered a separate factor. The most common (though simplistic) way to distinguish labor is to separate "unskilled," "moderately skilled," and "highly skilled" labor. In 1947 the US may have been the most well-endowed country in the world in highly skilled
and moderately skilled labor. Its exports were indeed skilled-labor intensive relative to its imports -- PRESERVING THE PRINCIPLE OF FACTOR PROPORTIONS. Furthermore, skilled labor is more expensive than unskilled labor (because it is scarcer than unskilled labor, everywhere in the world), so skilled-labor requirements "inflate" the proportion of labor costs within total costs. [This is a partial explanation of the paradox -- and see the
product life cycle model, below.] 5. The US imported natural-resource commodities whose extraction is capital-intensive, but in which other nations have an absolute advantage. In other words, some trade occurs based on where the products are found, not on their labor- or capital-intensity of production. [Empirically, this a partial explanation; the paradox was more apparent in US bilateral trade with resources-rich countries (e.g., Canada), and was less strong when natural-resource sectors were excluded.] 6. Technology itself is a nation-specific factor of production, rather than being a universal attribute of production. Furthermore, technology is a factor that is produced within a given nation (much like a commodity), but is not perfectly mobile or tradable. This kind of thinking has led to "neo-technology theories of trade" (see below). [This is potentially an explanation of the paradox; US exports -- including cotton -- were and are more technology intensive than its imports.]
� Concepts of product cycles had been developed in industrial economics and in marketing since the 1920's. Vernon, however, became concerned with the technological bases for PLCs in the late 1950s. with his work on the New York Regional Plan. He later extended these concerns to the international realm.
� income-elastic demand � L-saving in use � Assumes that product innovation is market-led [define product versus process innovation; technology-push versus market-pull models of innovation]. � Assumes that process technology undergoes stages distinguished by labor-intensity, standardization, unit cost, and ability for technology to be embodied in capital equipment and standard operating procedures. With these assumptions, Vernon built a story of these particular kinds of products facing This helps resolve the Leontief paradox by explaining, for a limited class of goods, US exports of these goods while they are L-intensive and import of these same goods when they are K-intensive. However, this model differs from the Heckscher-Ohlin theorem:
Six assumptions:
1) To the extent that individual companies cannot appropriate all the returns to their investment in new technology (because of externalities in the development and deployment of technology), 2) A country may gain comparative advantage in a product because it was quick to gain economies of scale in that product. As a result, it can produce the product more efficiently, relative to other products, than can its trading partners -- not because of factor endowments, but because of the skilled labor, specialized infrastructure, networks of suppliers, and localized technology that have developed to support that industry. 3) With the additional assumption (which is empirically based) that purchasers benefit from a choice among similar products, we can see how more than one country might gain comparative advantage in similar products, based on (a) similar factor endowments and (b) economies of scale in the production of particular variants of the products. This helps explain the cross-trade in similar products, usually with national variations -- think of the typical variations among German, Japanese, Swedish, and US-based automobiles.
c.f. the importance that Porter places on �related and supporting industries� to national competitiveness. SUMMARY: NO ALL-PURPOSE THEORY This may all seem bewildering, but so is the prospect of trying to predict and/or prescribe the myriad international trade flows. Trade in different products is likely to be best interpreted by different models, as I implied when I noted the characteristics of "product-cycle" goods. Here's a stab at such a typology:
What trade or development policies are implied by a desire to promote these different types of export capabilities?
IMMISERATING TRADE (concept developed by Jagdish Baghwati): If a country's imports depend on its export of basic, raw commodities, the country may face an inability to increase export earnings for three reasons, each related to the first term in our "gains from trade" model, above:
copyright James W. Harrington, Jr. What are the six theories of international trade?There are 6 economic theories under International Trade Law which are classified in four: (I) Mercantilist Theory of trade (II) Classical Theory of trade (III) Modern Theory of trade (IV) New Theories of trade. Both of these categories, classical and modern, consist of several international theories.
What is international trade and its theories?International trade theory is a sub-field of economics which analyzes the patterns of international trade, its origins, and its welfare implications. International trade policy has been highly controversial since the 18th century.
What are some of the important theories of international trade?What Is International Trade? International trade theories are simply different theories to explain international trade. ... . Mercantilism. ... . Absolute Advantage. ... . Comparative Advantage. ... . Modern or Firm-Based Trade Theories. ... . Country Similarity Theory. ... . Product Life Cycle Theory. ... . Global Strategic Rivalry Theory.. What are the four types of international trade?Types of International Trade. Import Trade. To put it simply, import trade means purchasing goods and services from a foreign country because they cannot be produced in sufficient quantities or at a competitive cost in your own country. ... . Export Trade. ... . Entrepot Trade. ... . The Way Forward.. |