International Trade Theory and Applications. three. Learning Concepts – Chapter 2. Chapter Two. 1. U nderstand the purpose of International Trade Theory as explanation, prediction and control of trade phenomena.
Learning Concepts – Chapter 2
1. Understand the purpose of International Trade Theory as explanation, prediction and control of trade phenomena.
2. Know theories that explain trade flows, like mercantilism, absolute advantage, comparative, advantage, Heckscher-Ohlin, product life cycle, income-preference similarity, and new trade theory.
Learning Concepts – Chapter 2 (cont)
3. Understand how theory is created and know that further trade theory development is needed that explains flows in human resources, capital, information, and technological resources.
4. Comprehend that international trade has grown dramatically in the goods, services, commodities, and information sectors.
Learning Concepts – Chapter 2 (cont)
5. Know that international trade is difficult to pressure and precisely explain in simplistic models.
6. Explain tariff and non-tariff barriers to trade and how they work.
Theories are representations of our understanding of “how the world works”. They explain the connection between variables, predict how and when those connections will exist, and set controls in relationship to when these theories apply, to what extent, and where they do not apply. All good theories should do these things.
Trade theory explains why trade exists, how it happens, and where it does and not occur. When you see trade theory, you want to ask some questions: (1) does theory x apply to something? (2) can I think of an example? (3) can I identify where it doesn’t work?
To overcome the contradictions in Heckscher-Ohlin, Leontief proposed the followings:
Up to now, trade has been explained as occurring from Absolute Advantage, Comparative Advantage, from factor endowments or moderated by taste, biases or policy.
Keesing had another idea. He indicated that trade direction and flow is predicted by gaps in human skills and technology.
According to Keesing, nations with higher levels of humans skills and technology will produce and export goods to nations with lower levels.
The product life cycle model by Raymond Vernon is closely related to the Keesing model.
Vernon’s PLC model asserts that product innovation and initial use occurs first in higher income countries and then diffuses to middle and lower income countries as technology and skills gaps overcome and consumer preferences switch to the newer products.
Several trends emerge in PLC:
Developed countries trade more than les developed countries – this is the assumption. Trade should take place between developed nations producing manufactured products and less developed nations producing primary products (e.g. natural resources) and labor-intensive goods.
According to Linder, the range of production is determined by internal demand. Countries with similar internal demand conditions should therefore trade. This is called Preference Similarity.
Up to now, trade theory has been dependent on national advantage, production efficiency, factor endowments, government agendas, country or industry maturity, or overlapping demand similarity. These theories have a few commonalities:
According to New Trade Theory, which is actually a set of papers by various scholars, trade is predicted by the increasing returns that firms can earn by trading intentionally. In New Trade Theory:
Remember, no theory thoroughly explains all trade, predicts it all accurately, and establishes limits on where trade does or does not occur. Every theory has advantages though, and it may be better to consider theory in combination rather in independently.
The overall trend is trade in favor of big growth. As the following slides show. In sum, though,
Trade measurement is generally a difficult exercise since nations do not use similar indexed systems. It is important to realize that different trade data is collected for different purposes and that aggregations may be biased. The general trend though is – “Trade is up”.
Each country collects and reports trade data-major sources of reliable data can be found from the U.S Department of Commerce, the World Trade Organization, Shippers Export Declarations, and the World Bank. The CIA Factbook also offers some trade data.
There are various arguments for erecting trade barriers - among them -