Trade Theory 1. International(or foreign) trade is across borders. 2. The Mercantilist Doctrine : mercantilism is the first(or preclassical) theory of international trade. 3. Absolute Advantage Theory : The absolute advantage theory holds that the market would reach an efficient end by itself. Government intervention in the economic life of a nation and in trade relations among nations is counterproductive. 4. Comparative Advantage Theory : It was the comparative advantage of a nation in producing a good relative to the other nation that determined international trade flow.
It is useful to introduce the concept of opportunity cost. 5. Heckscher-Ohlin Theorem : The central notion of the H-O theorem is that a country exports goods that make intensive use of the country’s abundant factor and imports goods that make intensive use of the country’s scarce factor. 6. The Leontief Paradox : Leontief’s paradox in economics is that the country with the world’s highest capital-per worker has a lower capital/labor ratio in exports than in imports. This econometric find was the result of Professor Wassily W.
... Smith developed the trade theory of absolute advantage in 1776. A country that has an absolute advantage produces greater output of a good or service than ... example of absolute advantage that both nations would gain from trade. ADAM SMITH’S TRADE THEORY OF ABSOLUTE ADVANTAGE: The first classical theory of international trade was propounded by ...
Leontief’s attempt to test the Heckscher-Ohlin theory empirically. In 1954, Leontief found that the U. S. (the most capital-abundant country in the world) exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with H-O theorem. 7. Human Skills and Technology-Based Views : The human skills and technology-based view is regarded as a refinement of the conventional theory of trade. It added two new factors of production, namely human skills and technology gaps, to the explanation of comparative advantage sources. 8.
The Product Life-Cycle Model : Product life cycle is the stages through which a product or its category bypass. From its introduction to the marketing, growth, maturity to its decline or reduce in demand in the market. Not all products reach this final stage, some continue to grow and some rise and fall. 9. Linder’s Income-Preference Similarity Theory : If two countries have the same or similar demand structures, then their consumers and investors will demand the same goods with similar degrees of quality and sophistication, a phenomenon known as preference similarity. 10.
The New Trade Theory : Countries do not necessarily specialize and trade solely to take advantage of their differences; also trade because of increasing returns, which makes specialization advantageous per se. Although this theory is not totally “new”, it makes several contributions to the understanding of international trade. Because of economies of scale, there are increasing returns to specialization in many industries. Economy of scale is reduction of manufacturing cost per unit as a result of increased production quantity during a given time period. 11. Trade Balance : Calculated as exports minus imports of goods and sevices. 2. Tariff Barriers : include mainly tariffs and quotas and their derivatives as well as export controls and antidumping laws. 13. Tariffs : are surcharges that an importer must pay above and beyond taxes levied on domestic goods and services. 14. Optimal Tariff : assumes that by imposing a tariff, governments can capture a significant portion of the manufacturer’s profit margin. 15. Infant Industries : are that an industry new to a country, especially a developing one, needs to be protected by tariff walls or risk being squashed by established global players before it is given a chance to grow and develop.
In the world market, countries trade products they wouldn’t be able to produce on their own. Countries like Cuba specializes in cigar production, Japan in electronics, and Russia in rocket technology. However, even if a country has an absolute advantage in producing all goods, they still will benefit from trade. Many economic factors are involved with trade. Among the major factors are ...
6. Quotas : are quantitative limitations on the importation of goods typically spelled in terms of units or value. 17. Rule of Origin : Both tariffs and quotas are administered on the basis of their country of origin, for which the default is the first importing country. Rule of origin terms may differ between different types of tariffs and supports. 18. Export Controls : are typically activated against products with a national security potential but also may be applied to so-called dual-use products such as advanced computers or trucks that can have both security and civilian uses. 9. Dumping and Antidumping : Dumping is defined by the WTO as selling a product at an unfairly low price, with the “fair price” defined as the domestic price, the price charged by an exporter in another market, or a calculation of production costs. Whereas antidumping measures were once almost exclusively applied by developed nations fearing competition from developing and especially emerging economies, they are now taken by developed and developing nations alike. 20.
Administrative Barriers : Often a government will use administrative measure to block the entry of products while continuing to argue that no barrier exists. (e. g.. Labeling) 21. Production Subsidies : are payments provided by a government or its agencies to domestic companies in order to make them more competitive vis-a-vis foreign competitors at home and/or abroad. 22. Emergency Import Protection : A government protect from sudden and dramatic increase in imports or in market share that can cause material damage to the domestic industry. 23.
Embargoes and Boycotts : Embargo is the prohibition on exportation to a designated country. Boycott is the blank prohibition on importation of all or some goods and services from a designated country. 24. Technical Standards : are provisions made by government agencies in various countries that pertain to a large array of areas. 25. Barriers to Service Trade : are quite different from the barriers affecting merchandise trade. Because knowledge plays a key role in a service economy, any limitations on the free flow of information, including constraints on individual mobility, represent barriers to service trade.