What are the Theories of International Trade
There are a few theories of international trade. One of the most famous is the theory of absolute advantage by Adam Smith. It’s main position are:
1) government should not interfere in the foreign trade regime to maintain open markets and free trade,
2) foreign trade stimulates the development of labor productivity by market expansion beyond national borders,
3) exports is a positive factor for the economy that provides sale of surplus products, which can’t be implemented on domestic markets.
Here are the other theories:
- The theory of comparative advantage (Ricardo) – if countries specialize in producing those goods which they may produce relatively lower cost than trade will be beneficial for both countries, innespective of whether the production of one of them is more effective than another.
- The theory Heksher – Ohlin (Neoclassical theory) – each country exports those goods factor- intensive for the production of which it has relatively surplus factors of production and importing those products production of which she feels the relative lack of factors production.
- The theory of scale – economy of scale: development of production in which growth factors, cost per unit leads to an increase in the production of more that one.
- Leontief paradox – it’s explanation:
1. distribution of workers by skill level,
2. capital imports of raw materials and exports of capital under production,
3. import partners,
4. tastes and preferences.