What Is Trade Theory Explain The Different Trade Theories

What is trade theory explain the
different trade theories

TRADE THEORIES
International trade theories are simply different theories to explain

international trade.
There is a great deal of theory, policy, and business strategy that
constitutes international trade.
There are different trade theories that have evolved over the past
century and which are most relevant today .
TRADE THEORIES
To better understand how modern global trade has evolved, its
important to understand how countries traded with one another
historically. Economists have developed theories to explain the
mechanisms of global trade.
Classical Trade Theories: The main historical theories are called
classical and are country-based.
Modern Trade Theories: By the mid-twentieth century, the theories
began to shift to explain trade from a firm, rather than a country-
based. These theories are referred to as modern and are firm-based or
company-based.
Both of these categories, classical and modern, consist of several
international theories.
TRADE THEORIES
Classical Trade Theories Country based:
1.. Mercantilism Theory
2 Absolute Advantage Theory
3..Comparative Advantage Theory
4.. Heckscher-Ohlin Theory (Factor Proportions Theory)
Modern or Firm-Based Trade Theories:

1.. Country Similarity Theory
2.. Product Life Cycle Theory
3.. Global Strategic Rivalry Theory
4.. Porters National Competitive Advantage Theory( Diamond Model)
TRADE THEORIES
Mercantilism Theory:
Developed in the sixteenth century, mercantilism was one of the
earliest efforts to develop an economic theory. This theory stated that a
countrys wealth was determined by the amount of its gold and silver
holdings.
In its simplest sense, mercantilists believed that a country should
increase its holdings of gold and silver by promoting exports and
discouraging imports.
TRADE THEORIES
Absolute advantage theory focused on the ability of a country

to produce/export a good more efficiently than another nation.
Countries should specialize in the production of goods for

which they have an absolute advantage and then trade these
goods for the goods produced by other countries.
If each country specializes in the production of the good in which

it has an absolute advantage and trades for the other, both
countries gain.
TRADE THEORIES
Comparative advantage theory, provides a strong rationale for
encouraging free trade.
Ricardos theory of comparative advantage suggests 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.
Comparative advantage focuses on relative productivity differences.
TRADE THEORIES
Heckscher-Ohlin Theory (Factor Proportions Theory)
Eli Heckscher and Bertil Ohlin - comparative advantage arises from differences
in national factor endowment. It means the extent to which a country is endowed
with resources like land, labor, and capital.
This theory predict that countries will export goods that make intensive use of
those factors that are locally abundant, and import goods that make intensive use
of factors that are locally scarce.
This theory, also called the factor proportions theory, stated that countries
would produce and export goods that required resources or factors that were in
great supply and, therefore, cheaper production factors.
Modern or Firm-Based Trade Theories
Country Similarity Theory: (Linder theory)
Theory propose that consumers in countries that are in the same or

similar stage of development would have similar preferences.
In this firm-based theory, Linder suggested that companies first
produce for domestic consumption. When they explore exporting, the
companies often find that markets that look similar to their domestic
one, in terms of customer preferences, offer the most potential for
success.
Linders country similarity theory then states that most trade in
manufactured goods will be between countries with similar per capita
incomes.
TRADE THEORIES
Product Life Cycle Theory .
The theory, originating in the field of marketing, stated that a product
life cycle has three distinct stages:
(1) new product,
(2) maturing product,
(3) standardized product.
The theory assumed that production of the new product will occur
completely in the home country of its innovation.
TRADE THEORIES
Global Strategic Rivalry Theory: emerged in the 1980s .

Theory focused on MNCs and their efforts to gain a competitive
advantage against other global firms in their industry.
Firms will encounter global competition in their industries and in order
to prosper, they must develop competitive advantages

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What is trade theory explain the

different trade theories

International trade theories are simply different theories to explain

Modern or Firm-Based Trade Theories:

Absolute advantage theory focused on the ability of a country

Countries should specialize in the production of goods for

If each country specializes in the production of the good in which

Theory propose that consumers in countries that are in the same or

Global Strategic Rivalry Theory: emerged in the 1980s .

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