Adam Smith and David Ricardo gave the classical theories of international trade. According to the theories given by them, when a country enters in foreign trade, it benefits from specialization and efficient resource allocation.
Sample Essay on International Trade Nov 03 Posted in Essay examples Nowadays, the modern economy has a dramatically increase, and also the economic globalization has been formed. Trade, especially international trade has become the most important role in the world economy.
However, what is trade, and what is international trade? Trade is the voluntary exchange of goods, services, assets or money between one person or organization and another. Through the trade, both parties believe they will gain the benefit from the exchange. Similarly, there are lots of different trade theories such as mercantilism, absolute advantage, comparative advantage and strategic trade theory.
As I mentioned above, the classical trade theories include mercantilism, absolute advantage and comparative advantage. In the early trade theories, the absolute advantage and comparative advantage trade are two main trade theories.
In the eighteenth and nineteenth century, the theories of absolute and comparative advantage were developed, and these have a major impact on the thinking and the policy prescriptions of economics.
First the British economist Adam Smith, then his compatriot David Ricardo, demonstrated that trade is beneficial for both of two countries participating in it. In these classical trade theories, absolute advantage and comparative advantage trade still have some differences.
The labor productivity is the most important part in absolute advantage. A country has an absolute advantage in the production of a good relative to another country if it can produce the good at lower cost or with higher productivity.
Therefore, the comparative advantage is the ability to produced one good at a relatively lower opportunity cost than other goods; it is based on the notion of opportunity costs within one country as compared to its economic partners.
Comparative advantage determines which products and services a country will export. Therefore, we can see that even if in classical trade theories, the absolute advantage and the comparative advantage trade theory have differences.
Even though the comparative advantage trade in the economics textbooks looks very perfect, it is still have differences compare with the real world. In a number of industries where technology advantages are significant only a few large firms compete.
This creates a market structure that has possible ramifications for how trade is conducted. This theory is desirable to have such first mover firms, as they bring tax revenue and high wages. So that it aims to attract or help to create such firms by providing subsidies or protection to particular candidate firms.
Therefore, we can find the difference between classical trade theory and strategic trade theory, the character of trade. Classical trade is a free trade; the voluntary exchange creates benefits for all parties to the exchange. The classical theory of comparative advantage for free trade argues that such trade is good for a country even if other countries do not return the favor.
However, the strategic trade likes monopolistic trade because of government trade intervention and protection. We can see that in situations where unit costs of production decrease with output or where significant commitment to research and development expenditures are necessary, there is only a few firms competing with each other.
In addition, the strategic subsidy is decisive in a new industry. Therefore, the strategic subsidy has the decisive effect in the strategic trade. In conclusion, the difference between classical trade theories and strategic trade theory is the character of trade theory.
As I mentioned above, classical trade is free trade, and strategic trade likes monopolistic trade, different situations use different trade theories. There are no absolute correct or wrong trade theories in the real world economy.Though many theories have been developed to explain various dimensions of FDI, the current chapter will endeavour to examine the following paradigms considering the scope of the present study namely: the classical international trade theory, the neoclassical location theory, the market imperfection theory, the OLI paradigm and Porter's .
(vii) The classical theory is a single market theory of value, while the modern theory emphasizes the importance of space element in international trade and involves a multi-market theory of value. (viii) The classical theory is a normative or welfare-oriented theory,.whereas the modern theory, is a positive theory.
terms-of-trade gain comes at the expense of a loss in real trade volume. The optimum rate of the duty is that which maximizes the excess of the gain from terms-of-trade improvement over the loss from lower trade volume and reduced international division of labor. The classical theory of trade is based on the labour cost theory of value.
This theory states that goods are exchanged against one another according to the relative amounts of labour embodied in them.
According to the classical Ricardian theory of comparative advantage, relative labor productivities deter- mine trade patterns. The Ricardian model plays an important pedagogical role in international economics.
In conclusion, the difference between classical trade theories and strategic trade theory is the character of trade theory. As I mentioned above, classical trade is free trade, and strategic trade likes monopolistic trade, different situations use different trade theories.
There are no absolute correct or wrong trade theories in the real world economy.