International Trade: From Wikipedia, The Free Encyclopedia
International Trade: From Wikipedia, The Free Encyclopedia
International Trade: From Wikipedia, The Free Encyclopedia
International trade uses a variety of currencies, the most important of which are held as foreign
reserves by governments and central banks. Here the percentage of global cummulative reserves
held for each currency between 1995 and 2005 are shown: the US dollar is the most sought-after
currency, with the Euro in strong demand as well.
Contents
[hide]
• 1 Models
○ 1.1 Ricardian model
1.1.1 Modern development of the Ricardian model
○ 1.2 Heckscher-Ohlin model
1.2.1 Reality and Applicability of the Heckscher-Ohlin Model
○ 1.3 Specific factors model
○ 1.4 New Trade Theory
○ 1.5 Gravity model
• 2 Top trading nations
• 3 Regulation of international trade
• 4 Risk in international trade
• 5 Gallery
• 6 See also
• 7 Footnotes
• 8 References
• 9 External links
○ 9.1 Data
[edit] Models
Several different models have been proposed to predict patterns of trade and to analyze the
effects of trade policies such as tariffs.
[edit] Ricardian model
Main article: Ricardian model
The Panama Canal is important for international sea trade between the Atlantic Ocean and the
Pacific Ocean.
The Ricardian model focuses on comparative advantage and is perhaps the most important
concept in international trade theory. In a Ricardian model, countries specialize in producing
what they produce best. Unlike other models, the Ricardian framework predicts that countries
will fully specialize instead of producing a broad array of goods.
Also, the Ricardian model does not directly consider factor endowments, such as the relative
amounts of labor and capital within a country. The main merit of Ricardin model is that it
assumes technology differences between countries.[citation needed] Technology gap is easily included
in the Ricardian and Ricardo-Sraffa model (See the next subsection).
The Ricardian model makes the following assumptions:
1. Labor is the only primary input to production (labor is considered to be the ultimate
source of value).
2. Constant Marginal Product of Labor (MPL) (Labor productivity is constant, constant
returns to scale, and simple technology.)
3. Limited amount of labor in the economy
4. Labor is perfectly mobile among sectors but not internationally.
5. Perfect competition (price-takers).
The Ricardian model measures in the short-run, therefore technology differs internationally. This
supports the fact that countries follow their comparative advantage and allows for specialization.
[edit] Modern development of the Ricardian model
The Ricardian trade model was studied by Graham, Jones, McKenzie and others. All the theories
excluded intermediate goods, or traded input goods such as materials and capital goods.
McKenzie(1954), Jones(1961) and Samuelson(2001)emphasized that considerable gains from
trade would be lost once intermediate goods were excluded from trade. In a famous comment
McKenzie (1954, p.179) pointed that "A moment's consideration will convince one that
Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in
England."[3]
Recently, the theory was extended to the case that includes traded intermediates.[4] Thus the
"labor only" assumption (#1 above) was removed from the theory. Thus the new Ricardian
theory, or the Ricardo-Sraffa model, as it is sometimes named, theoretically includes capital
goods such as machines and materials, which are traded across countries. In the time of global
trade, this assumption is much more realistic than the Heckscher-Ohlin model, which assumes
that capital is fixed inside the country and does not move internationally.[5]
[edit] Heckscher-Ohlin model
Main article: Heckscher-Ohlin model
In the early 1900s an international trade theory called factor proportions theory emerged by two
Swedish economists, Eli Heckscher and Bertil Ohlin. This theory is also called the Heckscher-
Ohlin theory. The Heckscher-Ohlin theory stresses that countries should produce and export
goods that require resources (factors) that are abundant and import goods that require resources
in short supply. This theory differs from the theories of comparative advantage and absolute
advantage since these theory focuses on the productivity of the production process for a
particular good. On the contrary, the Heckscher-Ohlin theory states that a country should
specialise production and export using the factors that are most abundant, and thus the cheapest.
Not to produce, as earlier theories stated, the goods it produces most efficiently.
The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic
comparative advantage. Despite its greater complexity it did not prove much more accurate in its
predictions. However from a theoretical point of view it did provide an elegant solution by
incorporating the neoclassical price mechanism into international trade theory.
The theory argues that the pattern of international trade is determined by differences in factor
endowments. It predicts that countries will export those goods that make intensive use of locally
abundant factors and will import goods that make intensive use of factors that are locally scarce.
Empirical problems with the H-O model, known as the Leontief paradox, were exposed in
empirical tests by Wassily Leontief who found that the United States tended to export labor
intensive goods despite having a capital abundance.
The H-O model makes the following core assumptions:
1. Labor and capital flow freely between sectors
2. The production of shoes is labor intensive and computers is capital intensive
3. The amount of labor and capital in two countries differ (difference in endowments)
4. free trade
5. technology is the same across countries (long-term)
6. Tastes are the same.
The problem with the H-O theory is that it excludes the trade of capital goods (including
materials and fuels). In the H-O theory, labor and capital are fixed entities endowed to each
country. In a modern economy, capital goods are traded internationally. Gains from trade of
intermediate goods are considerable, as it was emphasized by Samuelson (2001).
[edit] Reality and Applicability of the Heckscher-Ohlin Model
The Heckscher-Ohlin theory is preferred to the Ricardo theory by many economists, because it
makes fewer simplifying assumptions.[citation needed] In 1953, Wassily Leontief published a study,
where he tested the validity of the Heckscher-Ohlin theory[6]. The study showed that the U.S was
more abundant in capital compared to other countries, therefore the U.S would export capital-
intensive goods and import labour-intensive goods. Leontief found out that the U.S's export was
less capital intensive than import.
After the appearance of Leontief's paradox, many researchers tried to save the Heckscher-Ohlin
theory, either by new methods of measurement, or either by new interpretations. Leamer[7]
emphasized that Leontief did not interpret HO theory properly and claimed that with a right
interpretation paradox did not occur. Brecher and Choudri[8] found that, if Leamer was right, the
American workers consumption per head should be lower than the workers world average
consumption.
Many other trials followed but most of them failed.[9][10] Many of famous textbook writers,
including Krugman and Obstfeld and Bowen, Hollander and Viane, are negative about the
validity of H-O model.[11][12]. After examining the long history of empirical research, Bowen,
Hollander and Viane concluded: "Recent tests of the factor abundance theory [H-O theory and its
developed form into many-commodity and many-factor case] that directly examine the H-O-V
equations also indicate the rejection of the theory."[12]:321
Heckscher-Ohlin theory is not well adapted to the analyze South-North trade problems. The
assumptions of HO are less realistic with respect to N-S than N-N (or S-S) trade. Income
differences between North and South is the one that third world cares most. The factor price
equalization [a consequence of HO theory] has not shown much sign of realization. HO model
assumes identical production functions between countries. This is highly unrealistic.
Technological gap between developed and developing countries is the main concern of the poor
countries[13].
[edit] Specific factors model
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