Compare Different Models And Theories Of International Trade

2775 words - 11 pages

IntroductionIt is an accepted fact of life that no nation can achieve a completely independent existence because of the differences in factor endowment of nations. The global economy is an epitome of interdependence characterized by a complex flow of goods and products between countries, normally referred to an international trade. International trade involves voluntary exchange of goods, services, assets, or money between residents of two different countries or between different countries. Across the ages, businesses seeking markets have looked to trade beyond their home county. Growth in international trade has been a major contributor to the rise of the major industrialized countries, stretching back to the industrial revolution. International trade provides the opportunity for less endowed countries to acquire goods and products that are either not available or in short supply within the local economy.From the history of international trade, there are many different models and theories of international trade as following:MercantilismThe earliest attempt to explain the role of international trade in a nation's economy was dubbed mercantilism. The basic tenets of mercantilism were founded on the belief that there is a correlation between national wealth, power and security. Mercantilism trade policy was fundamentally nationalistic in orientation with the primary aim of accumulating the wealth and power of the state by encouraging exports and discouraging imports. In order to export more than they imported, governments established monopolies over their countries' trade. Restrictions were imposed on most imports, and many exports received subsidies. The principle of mercantilism is based on the belief that one nation can increase its trade only at some cost to other nations. It is the role of governments to control international trade by encouraging the exports of finished goods and imports of raw materials, and prohibiting the importation of finished goods. According to the mercantilist theory, countries should export more than they import and if successful, would receive the value of their trade surpluses in the form of gold form the country countries that ran deficits.Absolute advantageAdam Smith is the first major theorist of international trade. He believed that all countries benefit from unrestricted trade. Free trade is said to exist where citizens can sell abroad (export) and buy from abroad (import) without restrictions or barriers by governments of either the exporting or importing country. Smith reasoned that if trade were unrestricted, each country would specialize in those products that resulted in a competitive advantage for it. Each countries resource would shift to the efficient industries because the country could not complete in the inefficient ones. Through specialization, countries could increase their efficiency because of three reasons:1) Labor could become more skilled by repeating the same tasks.2) Labor would not lose...

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