Theories of International Trade

International Trade
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International Trade
Theories Of International Trade
The theory tends to analyze and respond to issues facing commercial activities between countries and how they impact on economic development. There are six main theories which have been developed since the 16thh century to present.
Theory of mercantilism
The theory argues that a country should aim at having a trade surplus by exporting more goods than it imports. This would enable the nation to accumulate more treasure in terms of gold and silver. Therefore, exports should be maximized through subsidies while imports should be restricted through tariffs. The essence of this theory is to discourage imports and encourage exports in order to ensure that financial wealth is accumulated.
Theory of absolute advantage
The theory of absolute advantage was proposed by Adam smith and it is based on the ability of a nation to efficiently produce more goods than another nation using the same amount of resources or raw materials. Therefore, a nation should concentrate in producing good whose resources are most efficient and import products whose production method is least sufficient. Therefore, a country benefits by specializing in production of goods that has absolute advantage since it is more efficient in utilizing its resources.
Theory of comparative advantage
The theory was proposed by David Ricardo and it is based on the efficiency of utilizing resources in order to enhance productivity. It is argued that if a nation has an absolute advantage in production of two different products, it should focus more on the goods whose production is more efficient and imports the other product whose production method is not as efficient. This is because a difference in absolute and relative advantages implies that the resources that were used in production of goods that has a relative advantage can be diverted to produce goods that have an absolute advantage.
Theory of proportional factors
This theory argues that every nation should maximize in the production of goods whose resources are more abundant. Therefore, extensive utilization of the resources that are more abundant would lead to increased efficiency. This implies that resource endowments are the main factors that influence patterns of trade and not necessarily the level of productivity. Raw materials that a nation has provides it with a huge advantage since it would benefiting from international trade by exporting goods whose production factors are abundant. Therefore, the factor that determines trade between two nations is the amount of raw materials that a nation has.
Theory of product life-cycle
It argues that the attributes of import and export of a certain product tend to differ during different periods of the commercialization process. The product cycle is divided into three phases which include introduction, maturity, and standardization. Basically, the theory believes that a company first begins by exporting the product that it produces and consequently moves to foreign direct investment as the lifecycle of the good matures. This implies that there will be changes in optimal production and sales location.
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