ASSIGNMENT

Make A Research on Reason of International Trade

International trade is the Exchanging method of goods and services across the international border.

The five main reasons international trade takes place are differences in technology, differences in resource
endowments, differences in demand, the presence of economies of scale, and the presence of government
policies. Each model of trade generally includes just one motivation for trade.

Differences in Technology:

Advantageous trade can occur between countries if the countries differ in their technological abilities to
produce goods and services. Technology refers to the techniques used to turn resources (labor, capital, land)
into outputs (goods and services).

Differences in Resource Endowments:

Advantageous trade can occur between countries if the countries differ in their endowments of resources.
Resource endowments refer to the skills and abilities of a country’s workforce, the natural resources available
within its borders (minerals, farmland, etc.), and the sophistication of its capital stock (machinery,
infrastructure, communications systems).

Differences in Demand:

Advantageous trade can occur between countries if demands or preferences differ between countries.
Individuals in different countries may have different preferences or demands for various products. For
example, the Chinese are likely to demand more rice than Americans, even if consumers face the same price.
Canadians may demand more beer, the Dutch more wooden shoes, and the Japanese more fish than
Americans would, even if they all faced the same prices.

Existence of Economies of Scale in Production:

The existence of economies of scale in production is sufficient to generate advantageous trade between two
countries. Economies of scale refer to a production process in which production costs fall as the scale of
production rises. This feature of production is also known as “increasing returns to scale.

Existence of Government Policies:

Government tax and subsidy programs alter the prices charged for goods and services. These changes can be
sufficient to generate advantages in production of certain products. In these circumstances, advantageous
trade may arise solely due to differences in government policies across countries.

THEORIES OF INTERNATIONAL TRADE

International trade theories were mainly developed under two categories, namely, classical or country-based
theories and modern or firm-based theories, both of which are further divided into various categories.
 • Classical or Country-Based Trade Theories

a. Mercantilism

b. Absolute Advantage

c. Comparative Advantage

d. Heckscher-Ohlin Theory (Factor Proportions Theory)

e. Leontief Paradox

• Modern or Firm-Based Trade Theories

a. Country Similarity Theory

b. Product Life Cycle Theory

c. Global Strategic Rivalry Theory

d. Porter’s National Competitive Advantage Theory

Absolute cost Advantage theory

In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations.Adam
Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell,
1776). Recent versions have been edited by scholars and economists. Smith offered a new trade theory called
absolute advantage, which focused on the ability of a country to produce a good more efficiently than another
nation. Smith reasoned that trade between countries shouldn’t be regulated or restricted by government
policy or intervention. He stated that trade should flow naturally according to market forces. In a hypothetical
two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country
A had the advantage and could focus on specializing on producing that good. Similarly, if Country B was better
at producing another good, it could focus on specialization as well. By specialization, countries would generate
efficiencies, because their labor force would become more skilled by doing the same tasks. Production would
also become more efficient, because there would be an incentive to create faster and better production
methods to increase the specialization.

Comparative Advantage

The challenge to the absolute advantage theory was that some countries may be better at producing both
goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful
absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of
comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the
production of both products, specialization and trade could still occur between two countries.

Comparative advantage occurs when a country cannot produce a product more efficiently than the other
country; however, it can produce that product better and more efficiently than it does other goods. The
difference between these two theories is subtle. Comparative advantage focuses on the relative productivity
differences, whereas absolute advantage looks at the absolute productivity.

Heckscher-Ohlin Theory (Factor Proportions Theory)

The theories of Smith and Ricardo didn’t help countries determine which products would give a country an
advantage. Both theories assumed that free and open markets would lead countries and producers to
determine which goods they could produce more efficiently. 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. Their theory is based on a
country’s production factors—land, labor, and capital, which provide the funds for investment in plants and
equipment. They determined that the cost of any factor or resource was a function of supply and demand.
Factors that were in great supply relative to demand would be cheaper; factors in great demand relative to
supply would be more expensive. Their theory, also called the factor proportions theory, stated that countries
would produce and export goods that required resources or factors that were in great supply and, therefore,
cheaper production factors. In contrast, countries would import goods that required resources that were in
short supply, but higher demand.

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.