International Trade Concepts - Literature review Example

International trade Introduction International trade entails the exchange of products (goods and services) across countryborders, and it produces various benefits to both the importing and exporting countries (Kerr & Gaisford, 2008). The countries that import products will benefit from getting products that they cannot produce o their own, and their exporter country will benefit from the income realized from the sale of products. With this in mind, international trade, therefore, will provide a framework for expanding a country’s market for both goods and services that may not have been obtainable if the country was dependent on its own resources. Globalization has further increased international trade as now countries are able to trade easily through flexible negotiations that will put away restrictions that may undermine trade between countries (Reuvid & Sherlock, 2011). International trade has provided grounds for increased competition, and this means that there are competitive prices in the market, which will see to it that consumers benefit from quality products, which are offered at low costs. International trade has resulted to the global economy which operates on the forces of demand and supply meaning that the prices of products are affected by events that occur globally (Aswathappa, 2010). For example, the political unrest in Libya caused the prices of gas to inflate in the whole world, and this clearly shows how the global economy works. Research shows that international trade is focused on by nations so that the citizens’ standards of living can be increased through the provision of various products and creation of job opportunities. International trade theories provide explanations, which will elaborate on the patterns global trade takes and the benefits that arise from it. The theories gives reasons as to why nations trade and why it is good to trade. This paper seeks to explain the theories that explain why countries engage in international trade and goes ahead to explain the benefits that countries get from international trade. Mercantilism Theory This theory was in application in the economic system of the 16th to 18th centuries, and its main objectives was to increase the wealth of a nation imposing regulations on the governments interests so as to ensure that the government had control on all of them (Ajami & Goddard, 2006). It was based on the fact that countries could accrue wealth in the form of precious metals, which is not practical because if every country decided to want to export and not importing from other countries, the worldwide economy would be sluggish due to restriction of free trade. The theory was mainly used by colonial governments such as Britain, France and Spain, which practiced the zero-sum –game that implied that wealth was scarce and countries could only benefit by taking advantage of the resources of their neighbors (Kerr & Gaisford, 2008). These governments would take advantage of their colonies by charging them high prices for imports and low for their own exports. This theory is seen as a hindrance to international trade as it was seen to favor exports and hinder imports in the colonial countries. Absolute Advantage Theory This theory was developed by Adam Smith (1776) and explains that a company has an advantage if it can produce the more products with similar resources or the same amount of products using fewer resources than its trading partners (Ajami & Goddard, 2006). With this in mind it follows that the country with the absolute advantage will be able to produce and export commodities at a lower cost than its trading partners, and this will be the basis of its trade relations with the partners. This is because the absolute advantage will have the propensity to reduce costs of production and at the same time increase profits which will in turn boost the economy. This theory further explains that market forces should determine trade and restrictions such as tariffs and quotas should be eliminated hence this destroys the mercantilism idea because it results to a gain in both the exporting and importing nations. Comparative Advantage and the Gains from Trade Theory This theory was developed by David Ricardo (1772-1823), who was an English economist and it explains that countries will engage in trade because they have the chance to benefit if they produce the commodities at a lower opportunity cost than other countries (Maneschi, 1998). The theory further explains that countries can take advantage of specialization and produce at a lower cost while utilizing the available resources. Given the example of two countries, say China and the United States which produce only two products, for example, cloth and copper. Then it happens that China can produce cloth at a cheaper and faster than the United States and the United States can produce copper at a cheaper cost than China. It follows that the two countries will produce more the two products if they decide to specialize with each country producing what they can at the lower cost. This means that China will export copper from the United States and China will export cloth to the United States implying that a comparative advantage will be created as the two countries will be able to benefit from each other by exchanging these products. Comparative advantage is achieved using the opportunity cost as one country will have to let go of the production of one product so as to produce another at a lower cost. Factor Proportions Theory (Heckscher-Ohlin Theory) This theory was developed by Heckscher, 1919, and Ohlin, 1933 and explains that countries will trade with each other because of differences in resources between nations (Ajami & Goddard, 2006). This means that countries will import those goods that they have limited supply of resources to produce and export those ones that they have abundant resources to be use in the production of goods. The basis of this theory is that a country should opt to produce particular products after evaluating the relative scarcity of the factors of production (land labor and capital) (Ajami & Goddard, 2006). With this in mind, the relative scarcity of these factors will determine the comparative advantage of a nation. A country having more resources than another will bee relatively abundant on the resource in question and will be expected to produce more of the product that uses that resource, and this is because it is more efficient to produce using the abundant resources. This theory also uses specialization as a country will export the product that it is more suited to produce and import the other products that it may not be suited to produce. An example of this can be explained by trade between the United States and Singapore. The United States has abundant land, and this will mean that it will export farm products while Singapore, which is abundantly endowed with marine resources, will export shipping equipment and both nations will be able to benefit from each other. The Product Life Cycle Theory (Raymond Vernon, 1966) This theory was developed by Raymond Vernon (1966), and it entails an analysis of the life time of a product from the time of introduction to when it is sold. This theory is used too understand the stages a product goes through within the market (Reuvid & Sherlock, 2011). Products will be launched in the local market and also the same will be exported to other countries that have the same needs and preferences. for example, the a certain type of motor vehicle can be introduced in the united states and within no time the same make will spread to other countries. This means that innovation and diffusion are important in this theory as the products will move through all the life stages of a product through diffusion, and this is forms the basis of trade within countries. New Trade Theory This theory was introduced by Paul Krugman and it is based on the assumption that despite some countries having the same resources and ability to produce, they will still trade and tries to explain this scenario. This theory gives reasons for trade to occur to be others than just having comparative advantage and these include imperfect competition, differentiated goods or variety and quality (Elhanan & Krugman, 1985). Countries will engage in trade so as to provide their citizens with a variety of products that are in existence in the global economy and this forms a basis of trade. National Competitive Advantage: Porter’s Diamond This theory was developed by Michael E Porter, and it elaborates that a country has the ability to increase it own factor endowments, which are skilled labor, improved technology, proper government structures and consumer culture that will give the nation a comparative advantage. This means that the proper utilization of a country’s resources will ascertain that strategic choices are made, which will see to it that there is industrial growth, and a country produces products that will compete in the global market through international trade (Negishi, 2001). Benefits of International Trade Trade in the recent years has been considered to be very important in the age of globalization. There are many reasons that may lead countries into engaging in international trade with other countries in order to grow. For example, international trade helps countries to acquire the resources that were previously not at their disposal, which eventually helps the country to meet the consumer demand more effectively. This is because of the fact that no nation can be able to produce all the products that it requires hence they are led into engaging in international trade. When a country engages in international trade through export of goods and services, they are able to publicize their countries recourses to other countries that were not aware of their products and services (Mankiw, 2011). This in the long run will enable the country to reach new markets, and increase export revenue earned, hence improves the economy. Countries that engage in international trade make an effort to ascertain that the goods and services they offer to other countries are of the highest quality so as to attract more countries into trading with them or so as to earn more revenue. This in the long enables the country’s consumers to enjoy high quality goods due to the availability of differentiated products in the market. International trade is beneficial to countries that have an abundance of resources since they are able to dispose off the excess products by trading them with other goods that they may require, which eventually prevents the wastage of the products. Through international trade healthy relationships are formed by the participating countries which enable them to have trust in each other and to exist in harmony (Aswathappa, 2010). Due to this relationship countries are able to assist each other during times of need such as when they are at war and when they are negotiating for loans. Given that different countries use certain currencies, they will have to trade with another country for the most suitable currency in order to purchase what they require. For example, when countries want to buy a product in dollars they have to trade with America by giving them a product for American currency since they are not permitted to print currency that they do not use in their country. This in turn will benefit both countries as good relationships will be created between the two. International trade tends to create employment opportunities since when companies are set up to deal with imports and exports many people are given jobs, which eventually better the countries economic status. Companies that engage in international trade in different countries are able to create a more competitive environment in the domestic market since they try to produce high quality products (Mankiw, 2011). In the long run, this leads to good customer service since their needs are met properly by high quality commodities. In addition, international trade enables countries to offset the seasonality of certain commodities, and this is because these products can be imported from to cater for the low supply during the low season of these commodities. Conclusion Globalization and the existence of trade with minimal regulations has played a crucial ole in fostering international trade, which ah contributed to various benefits to both the exporting and importing nations. This paper discussed the theories of international trade and its benefits. Today, countries are able to trade freely unlike before when the colonial governments imposed regulations for their own benefit. In return, the global economy has improved, and consumers are able to enjoy satisfaction of their needs from various products that are available in the market. References Ajami, R & Goddard, J 2006, International Business: Theory and Practice, M.E. Sharpe, New York. Aswathappa, 2010, International Business 4E, Tata McGraw-Hill Education, New Elhanan, H & Krugman P 1985, Market Structure and Foreign Trade, MIT Press, Cambridge. Delhi. Kerr, W, A & Gaisford, J, D 2008, Handbook on International Trade Policy, Edward Elgar Publishing, Massachusetts. Maneschi, A 1998, Comparative Advantage in International Trade: A Historical Perspective, Edward Elgar Publishing, Massachusetts. Mankiw, G 2011, Principles of Economics, Cengage Learning, Mason, OH. Negishi, T 2001, Developments of International Trade Theory, Springer, Massachusetts. Reuvid,J & Sherlock, J 2011, International Trade: An Essential Guide to the Principles and Practice of Export, Kogan Page Publishers, Philadelphia. Read More