File Name: theories of international trade and investment .zip
If you can walk into a supermarket and find Costa Rican bananas, Brazilian coffee, and a bottle of South African wine, you're experiencing the impacts of international trade. International trade allows countries to expand their markets and access goods and services that otherwise may not have been available domestically. As a result of international trade, the market is more competitive. This ultimately results in more competitive pricing and brings a cheaper product home to the consumer.
3 Classical Trade Theories – Discussed!
Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. If you can walk into a supermarket and find Costa Rican bananas, Brazilian coffee, and a bottle of South African wine, you're experiencing the impacts of international trade.
International trade allows countries to expand their markets and access goods and services that otherwise may not have been available domestically.
As a result of international trade, the market is more competitive. This ultimately results in more competitive pricing and brings a cheaper product home to the consumer. International trade was key to the rise of the global economy. In the global economy, supply and demand—and therefore prices—both impact and are impacted by global events. Political change in Asia, for example, could result in an increase in the cost of labor. This could increase the manufacturing costs for an American sneaker company that is based in Malaysia, which would then result in an increase in the price charged for a pair of sneakers that an American consumer might purchase at their local mall.
A product that is sold to the global market is called an export , and a product that is bought from the global market is an import. Imports and exports are accounted for in the current account section in a country's balance of payments.
Global trade allows wealthy countries to use their resources—for example, labor, technology, or capital —more efficiently.
Different countries are endowed with different assets and natural resources: land, labor, capital, and technology, etc. This allows some countries to produce the same good more efficiently—in other words, more quickly and with less of a cost.
Therefore, they may sell it more cheaply than other countries. If a country cannot efficiently produce an item, it can obtain it by trading with another country that can. This is known as specialization in international trade. For example, England and Portugal have historically both benefited by specializing and trading according to their comparative advantages.
Portugal has pentiful vineyards and can make wine at a low cost, while England is able to more cheaply manufacture cloth given its pastures are full of sheep. Each country would eventually recognize these facts and stop attempting to make the product that was more costly to generate domestically in favor of engaging in trade.
Indeed, over time, England stopped producing wine, and Portugal stopped manufacturing cloth. Both countries saw that it was to their advantage to stop their efforts at producing these items at home and, instead, to trade with each other in order to acquire them. These two countries realized that they could produce more by focusing on those products with which they have a comparative advantage. In such a case, the Portuguese would begin to produce only wine, and the English only cotton.
Each country can now create a specialized output of 20 units per year and trade equal proportions of both products. As such, each country now has access to both products at lower cost. We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specializing. Comparative advantage can be contrasted with absolute advantage.
Absolute advantage leads to unambiguous gains from specialization and trade only in cases where each producer has an absolute advantage in producing some good. If a producer lacks any absolute advantage then they would never export anything.
But we do see that countries without any clear absolute advantage do gain from trade because they have comparative advantage. According to the international trade theory, even if a country has an absolute advantage over another, it can still benefit from specialization. Comparative advantage, as we have shown above, famously showed how England and Portugal both benefit by specializing and trading according to their comparative advantages.
In this case, Portugal was able to make wine at a low cost, while England was able to cheaply manufacture cloth. Ricardo predicted that each country would eventually recognize these facts and stop attempting to make the product that was more costly to generate.
Chinese workers produce simple consumer goods at a much lower opportunity cost. American workers produce sophisticated goods or investment opportunities at lower opportunity costs. Specializing and trading along these lines benefit each country. The theory of comparative advantage helps to explain why protectionism has been traditionally unsuccessful.
If a country removes itself from an international trade agreement, or if a government imposes tariffs, it may produce an immediate local benefit in the form of new jobs.
However, this is often not a long-term solution to a trade problem. Eventually, that country will grow to be at a disadvantage relative to its neighbors: countries that were already better able to produce these items at a lower opportunity cost. Why doesn't the world have open trading between countries? When there is free trade, why do some countries remain poor at the expense of others? Say, for example, the producers of American shoes understand and agree with the free-trade argument—but they also know that their narrow interests would be negatively impacted by cheaper foreign shoes.
Appeals to save American jobs and preserve a time-honored American craft abound—even though, in the long run, American laborers would be made relatively less productive and American consumers relatively poorer by such protectionist tactics. International trade not only results in increased efficiency, but it also allows countries to participate in a global economy, encouraging the opportunity for foreign direct investment FDI. In theory, economies can thus grow more efficiently and can more easily become competitive economic participants.
For the receiving government, FDI is a means by which foreign currency and expertise can enter the country.
It raises employment levels, and theoretically, leads to a growth in gross domestic product GDP. For the investor, FDI offers company expansion and growth, which means higher revenues. As with all theories, there are opposing views. International trade has two contrasting views regarding the level of control placed on trade between countries. Free trade is the simpler of the two theories. This approach is also sometimes referred to as laissez-faire economics.
With a laissez-faire approach, there are no restrictions on trade. The main idea is that supply and demand factors, operating on a global scale, will ensure that production happens efficiently. Therefore, nothing needs to be done to protect or promote trade and growth because market forces will do so automatically. Protectionism holds that regulation of international trade is important to ensure that markets function properly. Advocates of this theory believe that market inefficiencies may hamper the benefits of international trade, and they aim to guide the market accordingly.
Protectionism exists in many different forms, but the most common are tariffs , subsidies , and quotas. These strategies attempt to correct any inefficiency in the international market. As it opens up the opportunity for specialization, and thus more efficient use of resources, international trade has the potential to maximize a country's capacity to produce and acquire goods.
Opponents of global free trade have argued, however, that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of continual change, and, as it develops, so too must its participants. Federal Reserve Bank of Dallas. Accessed August 5, The Library of Economics and Liberty. Liberty Fund.
Bryn Mawr College. Business Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice.
Popular Courses. Part Of. Global Players. Table of Contents Expand. Understanding International Trades. Imports and Exports. Comparative Advantage. Efficiency and Global Trade.
The Investor's Guide to Global Trade
That said, the theoretical focus of such scholarly activities has tended to reflect the multidisciplinary nature of the field. By far the most significant contributions to knowledge in the area can be sourced to the international economics, international finance and international business literatures. Attempts to explicate many of the dominant theories within these literatures. Contributions to the macro level of analysis can be found in the form of theories of international trade. Alternatively, micro theories engage the organization as the level of analysis and consideration is given to both the foreign direct investment decision process and pattern pursued by firms in internationalization. Discusses the nature and emphasis of these theories in the form of a critique. Morgan, R.
International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries. People or entities trade because they believe that they benefit from the exchange.
According to the theories given by them, when a country enters in foreign trade, it benefits from specialization and efficient resource allocation. The foreign trade also helps in bringing new technologies and skills that lead to higher productivity. The classical theories are divided into three theories, as shown in Figure Western European economic policies were greatly dominated by this theory.
International Economics I pp Cite as. The theories treated in the preceding chapters make up a consistent doctrine, in which from certain basic premises various theorems are deduced, concerning both positive and normative economics. This is the doctrinal body with which the orthodox theory of international trade is nowadays identified.