Theories in International Trade
Various theories of international trade have emerged and evolved over the years. Understanding them can help us better understand trade patterns and origins. Here are some of the most important theories in international trade.
.One of the oldest theories, mercantilism is an economic policy adopted by countries to maximize exports, while concurrently minimizing imports, thus creating a trade surplus. However, this model advocates for measures such as tariffs, subsidies and even imperialism to achieve this.
Absolute Advantage – Smith Model
.This refers to the model put forward in economist Adam Smith’s work, “The Wealth of Nations”. It revolves around the idea of absolute advantage, which is the ability of a country to produce a greater quantity of a good or service than its competitors. Accordingly, this determines who will be better at producing a particular good or service cheaply and reliably
Comparative Advantage – Ricardian Model
Economist David Ricardo proposed the idea of comparative advantage in his model. This refers to how, in an atmosphere of free trade, a country will produce more of a particular good or service, while consuming less of it, giving them a comparative advantage and the ability to sell the excess reliably and cheaply.
Heckscher-Ohlin (HO) Model
A more modern theory, proposed by economists Eli Heckscher and Bertil Ohlin, the HO Model is based on the premise of factor endowments; the quantity of land, labour, capital and entrepreneurship that a country has and can devote towards manufacturing. According to this model, countries export goods that their locally abundant endowment factors favour producing and import goods that locally scarce factors make expensive, inefficient or impossible to produce.
Other trade models do exist, such as New Trade Theory, which relies on the home-market effect. The Gravity Model is another theory, which posits that international trade reflects Newton’s law of gravity, where large economies attract smaller ones to trade with it.
Overall, it is reasonable to say that no country in the world uses one of these models exclusively and explicitly. Modern international trade is complex and based on many factors and countries will almost always adopt a hybrid approach, taking the best from some or all of these models.