Countries Can Gain from the Exchange of Goods with the Rest of the World: Pakistan

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Countries can gain from the exchange of goods with the rest of the world: Pakistan

For quite some time now academics have tried to explain not only the motivations and benefits, but also why through trade, some countries grow more quickly and wealthier than others. “The evolution of trade into the form we see today reflects three events: the collapse of feudal society, the emergence of mercantilist philosophy, and the life-cycle of the colonial systems of the European nation-states” (Czinkota, Ronkainem, Muffett, pp128 2009). The following essay will first explore some of the mainstream trade theories, such as the Heckscher-Ohlin trade theory and the Gravity model; and the time sequence in which they came about. Trade is argued to produce more gains in the form of increased overall output, than in a state of autarky; so the theories go. However, this statement will be empirically tested with the ten most important export partners for Pakistan and the accuracy of the theories evaluated all within the time-series of 2006 to 2010.

Since the fall of Mercantilism, at the start of the evolutionary path of trade was Adam Smith with his theory of absolute advantage; that countries should specialize in the production of that good in which it produces most efficiently and export it. Subsequently, David Ricardo’s theory of comparative advantage stated that the good that a country is relatively more efficient in producing should be should be specialized in and exported; in exchange for the good that it is relatively less efficient in producing which is imported. An expansion of Ricardo’s theory is the Heckscher-Ohlin theory of trade which, rather than assuming comparative advantage, explains it as it postulates that differences in labour, labour skills, physical capital, land or other factors of production across countries create productive differences that explain



Bibliography: * CEPII, 2012, GeoDist, 113 rue de Grenelle Paris, CEPII, available at: http://www.cepii.fr/anglaisgraph/bdd/distances.htm accessed on 10/2/12 * ECONOMIC & SOCIAL DATA SERVICE INTERNATIONAL, 2011, Direction of Trade, International Monetary Fund, University of Essex, ESDS, available at: http://www.esds.ac.uk/ accessed on 11/2/12 * ECONOMIC & SOCIAL DATA SERVICE INTERNATIONAL, 2011, World Development indicators, World Bank Data, University of Essex, ESDS, available at: http://www.esds.ac.uk/ accessed on 11/2/12 * M.R. CZINKOTA, M.H. RONKAINEM & M.H. MUFFETT, 2009, Fundamentals of International Business, 2nd Ed, Baltimore USA, Wessex Press * M.R. VAGHEFI, S.K. PAULSON, W.H. TOMLINSON, 1991, International Business Theory & Practice, 4 John St London, Taylor & Francis

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