Summary of International Trade Theory
Trade theory, is useful because it helps to explain what might be produced competitively in a given locale, where a company might go to produce a given product efficiently, and ^whether governmental practices will interfere with the free flow of trade among countries.
Some trade theories deal with the question of what will happen to international trade in the absence of governmental interference; others prescribe how government should interfere with trade flows in order to achieve certain national objectives.
Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) in order to receive an influx of gold. Neomercantilist theory also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective.
Adam Smith developed the theory of absolute advantage, which holds that consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic ones.
According to the theory of absolute advantage, a country may produce goods more efficiently because of a natural advantage (e.g., raw materials, climate) or because of an acquired advantage (e.g., technology or skills).
The theory of country size holds that because countries with large land areas are more apt to have varied climates and natural resources, they are generally more nearly jelf-sufficient than smaller countries. A second reason for their greater self-sufficiency is that their production centers are more likely to be located at a greater distance from other countries, thus raising the transport costs of foreign trade.
The_comparative advantage theory holds that total output can be increased through foreign trade^ven though one country may have an absolute advantage in the production of all products.
Some of the assumptions of the absolute and comparative trade theories that have been questioned by pohrymakers_are that full employment exists, that output efficiency is the major objective, that there are no transport costs among countries, that resources move freely within countries, and that resources are immobile internationally.
The factor-proportions theory holds that the relative factor endowments in a country of land, labor, and capital will determine the relative costs of these factors. These costs, in turn, will determine what goods a country can produce most efficiently.
The theory of product life cycle (PLC) states that many manufactured products will first be produced in the countries in which the products were researched and developed. These are almost always industrialized countries, with the United States accounting for the largest share in recent years. Over the life of the product, production will tend to become more capital intensive and will be shifted to foreign locations.
According to the country-similarity theory of trade, most trade today takes place in manufactured goods among industrial countries because there are more-similar market segments among these countries.
LDCs have been increasingly concerned that they are overly vulnerable to events in other countries because of their high dependence on one export product and/or one trading partner. As they try to become more independent
of the external environment, however, they face the risk that their own consumers may have to pay higher prices or do without some goods.
Although most trade theories deal with country-to-country benefits and costs, it is usually at the firm level that trading decisions are made. Companies may seek trading opportunities in order to use excess capacity, lower production costs, or spread risks. They may not engage in foreign trading activities, however, because of ignorance of opportunities or how to take advantage of them or because they consider foreign operations too risky.
Some trade theories deal with the question of what will happen to international trade in the absence of governmental interference; others prescribe how government should interfere with trade flows in order to achieve certain national objectives.
Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) in order to receive an influx of gold. Neomercantilist theory also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective.
Adam Smith developed the theory of absolute advantage, which holds that consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic ones.
According to the theory of absolute advantage, a country may produce goods more efficiently because of a natural advantage (e.g., raw materials, climate) or because of an acquired advantage (e.g., technology or skills).
The theory of country size holds that because countries with large land areas are more apt to have varied climates and natural resources, they are generally more nearly jelf-sufficient than smaller countries. A second reason for their greater self-sufficiency is that their production centers are more likely to be located at a greater distance from other countries, thus raising the transport costs of foreign trade.
The_comparative advantage theory holds that total output can be increased through foreign trade^ven though one country may have an absolute advantage in the production of all products.
Some of the assumptions of the absolute and comparative trade theories that have been questioned by pohrymakers_are that full employment exists, that output efficiency is the major objective, that there are no transport costs among countries, that resources move freely within countries, and that resources are immobile internationally.
The factor-proportions theory holds that the relative factor endowments in a country of land, labor, and capital will determine the relative costs of these factors. These costs, in turn, will determine what goods a country can produce most efficiently.
The theory of product life cycle (PLC) states that many manufactured products will first be produced in the countries in which the products were researched and developed. These are almost always industrialized countries, with the United States accounting for the largest share in recent years. Over the life of the product, production will tend to become more capital intensive and will be shifted to foreign locations.
According to the country-similarity theory of trade, most trade today takes place in manufactured goods among industrial countries because there are more-similar market segments among these countries.
LDCs have been increasingly concerned that they are overly vulnerable to events in other countries because of their high dependence on one export product and/or one trading partner. As they try to become more independent
of the external environment, however, they face the risk that their own consumers may have to pay higher prices or do without some goods.
Although most trade theories deal with country-to-country benefits and costs, it is usually at the firm level that trading decisions are made. Companies may seek trading opportunities in order to use excess capacity, lower production costs, or spread risks. They may not engage in foreign trading activities, however, because of ignorance of opportunities or how to take advantage of them or because they consider foreign operations too risky.
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