International Trade Theories – Essay – giddinma
Sign up
Sign in
Contact us
International Trade Theories
International Trade TheoriesTo 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 mercantilism theory was the first international trade theory which emerge in England around the mid-16th century which states that a nation should accumulate financial wealth usually in the form of gold and silver by encouraging export through government subsidies and discouraging imports via tariffs and quotas. The mercantilism theory is viewed as a zero sum game which meant that world wealth was limited and that countries only could increase their share at expense of their neighbours. This theory has then been revised by Adam Smith and David Ricardo which showed that international trade is a positive sum game.During the year 1776, Scottish economist Adam Smith introduced his theory of absolute advantage as he strongly criticized the mercantilist assumption that trade is a zero sum game and advance free trade as it enlarges a country’s wealth. Absolute advantage implies that a country should import goods that are cheaper abroad and export goods it can produce more efficiently than other countries. He stated that countries differ in their ability to produce goods efficiently and that a country should never produce a good at home that it can buy at a lower cost from other countries. In addition, Smith stated that when countries specialize in the production of goods in which each has an absolute advantage, both countries can benefit by engaging in international trade activities.  In 1817, David Ricardo took Adam Smith’s theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods. He postulated that even if countries do not have an absolute advantage, they can still derive benefits from international trade by allocating resources based on their comparative advantage and trade with each other. This theory states that nations should concentrate on what it could produce cheaply and efficiently and should trade its product for those good that it’s less able to produce economically.

In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. They argued that countries that have different factor endowment of labour, land and capital input should specialize in and export those products which intensively use the factors of production which they are most endowed. Total output and economic welfare can be increased if each country specializes in those goods and services where they have an advantage. For example, China and India are home to cheap, large pools of labor. Hence these countries have become the optimal locations for labor-intensive industries like textiles and garments.In the continuing evolution of international trade theories, Michael Porter developed a new model to explain national competitive advantage in 1990. His theory attempts to determine why some countries succeed while other fails in international competition. Porter theorizes that four attributes also known as Porter’s Diamond was responsible for this success or failure. These attributes are, Factor Endowments, Demand Conditions, Relating and Supporting Industries, Firm’s strategy, structure and domestic rivalry. Porter argued that firms are most likely to succeed in industries that the diamond is most favourable.

Continue for 3 more pages »
Read full document
Download as (for upgraded members)
Citation Generator
(2016, 11). International Trade Theories. Retrieved 11, 2016, from
“International Trade Theories” 11 2016. 2016. 11 2016 < "International Trade Theories.", 11 2016. Web. 11 2016. < "International Trade Theories." 11, 2016. Accessed 11, 2016. Essay Preview By: giddinma Submitted: November 11, 2016 Essay Length: 862 Words / 4 Pages Paper type: Essay Views: 458 Report this essay Tweet Related Essays International Trade International Trade In today's world there are many issues in need of reformation, one of which is international trade, otherwise known as globalization. Although there 841 Words  |  4 Pages International Trade International trade is the purchase, sale, or exchange of goods and services across national borders. International trade provides a country’s citizens a greater choice 795 Words  |  4 Pages The International Trade Liberalization of India Final Paper March 14, 2005 The International Trade Liberalization of India According to many global economic studies the key to peace is through the promotion 1,529 Words  |  7 Pages International Trade Theories INTERNATIONAL TRADE THEORIES One of the avenues to address this is to seek help from the Embassy of the other country. For example, if the 371 Words  |  2 Pages Similar Topics Body Shop International Swot Model International Trade Get Access to 89,000+ Essays and Term Papers Join 209,000+ Other Students High Quality Essays and Documents Sign up © 2008–2020 EssaysForStudent.comFree Essays, Book Reports, Term Papers and Research Papers Essays Sign up Sign in Contact us Site Map Privacy Policy Terms of Service Facebook Twitter

Get Your Essay

Cite this page

International Trade Theories And International Trade Theoriesto. (April 5, 2021). Retrieved from