Overview Trade Theories International Economics For Merge Essay
Overview trade theories Classical trade theories Explanation International Economics Absolute advantage theory (Smith) * When one nation is more efficient than another in the production of one commodity but is less efficient than the other nation in producing a second commodity, then both nations can gain by each specializing in the production of the commodity of its absolute advantage (most efficient commodity) and exchanging part of its output with the other nation for the commodity of its absolute disadvantage (least efficient commodity).
Comparative advantage theory (Richard) According to the law of comparative advantage, even if one nation is less efficient than (has an absolute disadvantage with respect to) the other nation in the production of both commodity one and two, there is still a basis for mutually beneficial trade. The first nation should specialize in the production of and export the commodity in which its absolute disadvantage is the smallest (=commodity of its comparative advantage) and import the commodity in which its absolute disadvantage is greater (=comparative disadvantage).
Shortcomings Classical trade theories ) Labor theory of value Arcadian theory of international trade assumes the application of labor theory of value (amount of labor going into the production determines the value or price
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Specific Factors Model (Vine) * This theory analyses the distribution of income resulting from free trade, when factors are specific to a sector. This implies that the factor is immobile even across industries within a country. * When trade is opened and one country has a comparative advantage in computers, more labor will move to the computer industry and less to the steel industry, so that as more computers are produces, prices of computers go up more than the wage costs, so that incomes of computer capital owners will increase (reverse happens in steel industry).
Example: Labor can move between computer and steel industries, but capital cannot (steel capital cannot be used in computer industry and vice-versa). International Product Life Cycle Theory (Vernon) * Many manufactured products will be produced first in the countries in which they were researched and developed (mostly industrialized countries). Over the product’s fife cycle, production will tend to become more labor-intensive and will be shifted to foreign locations. This model by Vernon relaxes assumptions about same technology 0 now countries have different technologies.
Speed of product life cycle depends on technology and ease to produce! * There exist 4 stages in the life off product 1) Introduction: manufactured good is introduced in the home market (high price) 2) Growth: Domestic industry shows export strength. 3) Maturity 4) Decline (lower price) Country similarity theory (Lender) = Spill-over theory of trade = Theory of overlapping demand Lender advanced the hypothesis that a country exports those manufactured goods for which there is a broad local market.
He assumed that when exports grow out of domestic production, I. E. The domestic market is saturated, producers try to expand by beginning to sell the product in other markets abroad. * His theory is also known as “Countries similarity theory’ assuming that countries with similar income levels and standards of living will consume similar types of goods. Hence, rich countries relaxes the classical assumptions which emphasized country differences based on trial advantage.