// On :Wednesday, June 6, 2012
Good Afternoon, Friends!
International Trade is the
exchange of capital, goods, and services across international borders or
territories. In most countries, such trade represents a
significant share of gross domestic product (GDP). While international trade has
been present throughout much of history (see Silk Road, Amber Road), its
economic, social, and political importance has been on the rise in recent
centuries.
Industrialization, advanced transportation, globalization, multinational
corporations, and outsourcing are all having a major impact on the
international trade system. Increasing international trade is crucial to the
continuance of globalization. Without international trade, nations would be
limited to the goods and services produced within their own borders.
International trade is, in principle, not different from domestic
trade as the motivation and the behavior of parties involved in a trade do not
change fundamentally regardless of whether trade is across a border or not. The
main difference is that international trade is typically more costly than
domestic trade. The reason is that a border typically imposes additional costs
such as tariffs, time costs due to border delays and costs associated with
country differences such as language, the legal system or culture.
The model of International Trade:
1. Adam Smith Model
Adam Smith
displays trade taking place on the basis of countries exercising absolute cost
advantage over one another.
2. Ricardian model
The Ricardian model
focuses on comparative advantage, perhaps the most
important concept in international trade theory. In a Ricardian model,
countries specialize in producing what they produce best, and trade occurs due
to technological differences between countries. Unlike other models, the
Ricardian framework predicts that countries will fully specialize instead of
producing a broad array of goods.
Also, the Ricardian
model does not directly consider factor endowments,
such as the relative amounts of labor and capital within a country. The main
merit of Ricardian model is that it assumes technological differences between
countries. Technological
gap is easily included in the Ricardian and Ricardo-Sraffa model (See the Ricardian theory (modern development)).
The Ricardian model
makes the following assumptions:
- Labor is the only primary input to production (labor is considered to be the ultimate source of value).
- Constant Marginal Product of Labor (MPL) (Labor productivity is constant, constant returns to scale, and simple technology.)
- Limited amount of labor in the economy
- Labor is perfectly mobile among sectors but not internationally.
- Perfect competition (price-takers).
The Ricardian model
applies in the short run, so that technology may vary internationally. This
supports the fact that countries follow their comparative advantage and allows
for specialization.
For the modern
development of Ricardian model, see the subsection below: Ricardian theory of international trade.
3. Heckscher-Ohlin model
In the early 1900s an
international trade theory called factor proportions theory was developed by
two Swedish economists, Eli Heckscher and Bertil Ohlin.
This theory is therefore called the Heckscher-Ohlin theory (H-O theory). The
H-O theory stresses that countries should produce and export goods that require
resources (factors) that are abundant and import goods that require resources
in short supply. It differs from the theories of comparative advantage and
absolute advantage since those theories focus on the productivity of the
production process for a particular good. On the contrary, the Heckscher-Ohlin
theory states that a country should specialize in producing and exporting
products that use the factors that are most abundant, and thus are the cheapest
to produce.
The Heckscher-Ohlin
model was produced as an alternative to the Ricardian model of basic
comparative advantage. Despite its greater complexity it did not prove much
more accurate in its predictions. However from a theoretical point of view it
did provide an elegant method of incorporating the neoclassical price mechanism
into international trade theory.
The theory argues that
the pattern of international trade is determined by differences in factor endowments.
It predicts that countries will export
those goods that make intensive use of locally
abundant factors and will import goods that make intensive use of factors that
are locally scarce. Empirical problems with the H-O model, such as the Leontief paradox,
were exposed in empirical tests by Wassily Leontief
who found that the United States tended to export labor-intensive goods despite
having an abundance of capital.
The H-O model makes the
following core assumptions:
- Labor and capital flow freely between sectors
- The amount of labor and capital in two countries differ (difference in endowments)
- Free trade
- Technology is the same among countries (a long-term assumption)
- Tastes are the same.
The problem with the H-O
theory is that it excludes the trade of capital goods (including materials and
fuels). In the H-O theory, labor and capital are fixed entities endowed to each
country. In a modern economy, capital goods are traded internationally. Gains
from trade of intermediate goods are considerable, as emphasized by Samuelson
(2001).
This is so interesting, isn't it? I hope you like it and have same interest with me too! Thanks for read. See you in next post!
Source: Here
