What are some of the important theories of international trade?

Similarly, countries develop and use international trade theories to improve their macro-economic situations. Such as by figuring out who they should trade with, what they should manufacture to trade, and how they can boost their production to improve their overall international trade.

What is International Trade Theory?

International trade is the exchange of goods and services across international borders. Over the past couple of hundred years, we have developed more regulations to protect domestic traders and the trade itself. We have worked on business models that teach businesses how to use their resources as efficiently as possible.

The work done on international trade since the 18th century has been with the same goal. International trade theory is dominated by how a country can efficiently use its natural resources. Should a country try to end its reliance on imports? What kind of products can be imported? How can the exports be boosted?

International trade theory has micro and macro practical implications on countries.

For example, Country X needs food. If country X spends all of its resources on making food, it will not export anything; it will be inefficiently made and costly to the consumers. Country X could spend some of its resources to make technology products that could be traded for the food it needs. What should it do? How much of its resources should be diverted to technology products?

Similarly, Country X might incentivize their firms to develop products for exports through tax cuts or by giving them raw materials at a subsidized rate.

International Trade Theory influences policy-makers on both such decisions.

Why is International Trade Theory Important?

International Trade Theories explain and facilitate international trade to happen. A wrong mindset or an ill-advised view on international trade can severely affect a country’s long-term financial stability.

For example, different international trade theories would compete on the idea the following. Can countries ban products of other countries? Such as through slavery or child labor? A trade theory that only looks at financial figures and statistics will favor such working environments.

Another trade theory will argue that the long-term effects of child labor will cause more harm to both of the countries involved in the trade. A third trade theory will argue that trade founded on slavery or child labor is not inherently good or bad for the traders; rather, it will differ from case to case.

Since International Trade Theory can be so controversial and impactful, it is important to study it well. The policy-makers must have a comprehensive knowledge of all possible theories and apply the best theory that fits their country’s particular situation.

Some Common Ideas of International Trade Theory

Absolute Advantage: Absolute advantage theories state the following. Countries should find products that they can make better and more efficiently than their competitors. All countries should make only those products and use international trade to fill their other needs and requirements.

Comparative Advantage: Theories based on comparative advantage take advantage of this real-life phenomenon. Countries tend to have some area of expertise they are more technologically progressed in. If those countries made products of another category, they would have some opportunity costs. Comparative advantage suggests that these opportunity costs have to be calculated and used to develop policies.

Factor Endowment: Most theories use factor endowments as a metric to divide international trade into categories and levels. Factor endowment is simply the resources available to the country to use for manufacturing any products. Trade theories can then use this metric to divide international trade into trade between countries with similar and dissimilar factor endowments.

Home Market Effect: This idea ignores comparative advantage as the best option. Home market effect says that industries will minimize their transportation costs and limit themselves to one country if their vision is that of ‘Returns to Scale.’ This opened a new dimension to how a country’s market size relates to its exports.

“New” New Trade Theory: the “new” new trade theory found out that firms that produce products for exports are more productive than firms that produce the same product for domestic markets. This theory tries to look at other factors that affect how well a country uses its resources. For instance, globalization is seen as an uplifting presence for the country.

The field of International Trade Theory is massive and can be confusing. But in essence, it all comes down to making better financial decisions for both countries in the trade.

What are the importance of theories in international trade?

What are the three theories of international trade?

What is international trade and its theories?

What are the types of trade theories?