TRADE THEORY

Trade Theory

Trade Theory

Introduction

The different theories that explain the process of functioning of international trade explain the causes of this trade and study the effects of international trade on the production and consumption countries (Bartlett & Beamish 2011). This paper presents an analysis of these theories and provides a view on a possible use of theory that best fits the trading situation of United States.

Beginnings of International Trade Theory

The first international trade theory emerged in England in the sixteenth century (Smith 2010). It was known as mercantilism, its declaration of principles was that the gold and silver were the mainstays of national wealth and are essential to a vigorous trade (www.europa.eu).

Absolute advantage

Adam Smith in his classic work "The Wealth of Nations", 1776, argued that countries should specialize in producing goods for which they have an absolute advantage and then trade these products for items produced by other countries, never produce at home that can be acquired at a lower cost in other countries. This theory despite was the first to consider specialization as a strategic factor for the countries, taking it only at the whole country, not at the level of regions. Currently no country has a total monopoly in the production of an item, but on the contrary, there is a competition between countries to win markets with manufactured goods (www.iatp.com).

Theory of product life cycle

Raymond Vernon proposed the theory of product life cycle in the mid-sixties. The theory was that so apparent, the pioneers in a product they thought it was best to keep production plants near the market and the place of decision making. Due to the novelty of the product, companies can charge relatively high prices for its new products. The initial demand in other advanced countries does not justify the initial production in these countries. As the market matures, the product becomes more standardized, as this occurs, cost considerations are a more important role in the competitive process and production was moved again, this time to developing countries. The cycle can be repeated as developing countries begin to acquire a production advantage over developed countries.

Heckscher-Ohlin theory

Heckscher-Ohlin theory successfully explains many of the patterns of international trade. The Heckscher-Ohlin theory explains how the mechanism of international trade works. The theory states that countries specialize in exporting goods that require large amounts of factors of production that are comparatively abundant, and import those goods whose production factors are most scarce. Different countries have different endowments of factors. Some countries have abundance of capital and others have relative abundance of factors of production other than capital. However, not all the phenomena of international trade are stacked in the scheme proposed by Heckscher and Ohlin. The structure of the productive resources available to industrialized countries is gradually leveling. The center of gravity of world trade is gradually shifting to the mutual trade, with countries trading "like" products.

Leontief Paradox

In 1947, Leontief attempted to empirically test the conclusions of the Heckscher-Ohlin theory and came to the paradoxical ...