International trade theory provides explanations of the benefit for country to engage in international trade, even for products it can produce for itself. As time goes by, there are mainly 7 types of theory, namely, mercantilism, absolute advantage, comparative advantage, Heckscher-ohlin theory, product life-cycle theory, new trade theory, Porter’s diamond national competitive advantage theory. Although some of the theories hold different view of patterns of international trade and vary in attitude for free trade, they all proposed that international trade is beneficial. International trade, referring to the exchange of capital, goods, and services across international borders or territories, allows a country to specialized in the manufacture and export of products that it can produce efficiently while importing products that can be produced more efficiently in other countries. This essay will…. Main theory
Mercantilism, the first theory of international trade, asserts that trade is a zero-sum game and thus countries benefit from trade by maintaining a trade surplus—export more and import less. Therefore, it advocates government intervention to limit import and subsidize export, achieving a surplus in its trade balance and therefore increasing its national wealth, prestige and power. It is a tool for political parties to support trade protectionism. For example, American president Obama encourages US companies to keep producing within country although outsourcing to China is more efficient. However, Hume claimed that trade surplus on the balance of trade cannot be sustained in the long run as the change of inflation in both trading partners would finally eliminated the surplus. More importantly, Hill (2011) claimed that trade is actually a positive-sum game and allows trading partner generate mutual benefit.
Theory of absolute advantages developed by Adam Smith mainly argues that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. As a result, countries should specialise their production only on goods that they have absolute advantage in production and trade with each other. Therefore, all countries can benefit by engaging in trade since they can all generate production efficiency as well as a larger volume of goods to consumption. E.G. South korea and Ghana—rice and coca Theory of comparative advantage is developed by Ricardo and it is based on the Smith’s absolute theory. Although Smith points out that trade are not beneficial for the country that has an absolute advantage in the production of all goods, Ricardo demonstrates that countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries, even if this means buying goods from other countries that they could produce more efficiently at home. It assert that trade is mutually beneficial to both trading partners via achieving production efficiency generating economies of scales and consume a larger volume of goods. Different from Mercantilism, this theory support unrestricted free trade instead of restricted trade. It admit that there are short-term adjustment costs associated with adopting a free trade regime, but trade would help to produce greater economic growth and higher living standards in the long turn, as is shown by the data evidence that 10% increase in the importance of international trade in an economy can lead to a rise by at least 5%in average income levels. However Ricardo’ theory is based on some unrealistic assumptions, for example, within the theory there are only two countries and two goods. Also, it neglect transportation cost, prices of resources and exchange rate. Moreover, it assumes that all resource can be transferred and countries are generating constant returns to scales. Samuelson criticises that there indeed exist immobile resources,...
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