By doing so Cotton Land will eliminate its furniture industry. However, it can trade the surplus cloth for furniture. Similarly, Wood Land can direct all its resources to the production of furniture and produce 16 pieces of furniture.
Adam Smith Adam Smith describes trade taking place as a result of countries having absolute advantage in production of particular goods, relative to each other.
David Ricardo The law of comparative advantage was first proposed by David Ricardo. The Ricardian theory of comparative advantage became a basic constituent of neoclassical trade theory. Any undergraduate course in trade theory includes a presentation of Ricardo's example of a two-commodity, two-country model.
For the modern development, see Ricardian theory of international trade modern development The Ricardian model focuses on comparative advantagewhich arises due to differences in technology or natural resources.
The Ricardian model does not International trade theories consider factor endowmentssuch as the relative amounts of labor and capital within a country. The Ricardian model is based on the following assumptions: Labor is the only primary input to production.
The relative ratios of labor at which the production of one good can be traded off for another differ between countries. Heckscher—Ohlin model In the early s, a theory of international trade was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin.
This theory has subsequently become known as the Heckscher—Ohlin model H—O model. The results of the H—O model are that the pattern of international trade is determined by differences in factor endowments.
It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. The H—O model makes the following core assumptions: Labor and capital flow freely between sectors equalising factor prices across sectors within a country.
The amount of labor and capital in two countries differ difference in endowments Technology is the same among countries a long-term assumption Tastes are the same Applicability[ edit ] InWassily Leontief published a study in which he tested the validity of the Heckscher-Ohlin theory.
Leontief found out that the United States' exports were less capital intensive than its imports. The result became known as Leontief's paradox. After the appearance of Leontief's paradox, many researchers tried to save the Heckscher-Ohlin theory, either by new methods of measurement, or by new interpretations.
Specific factors model[ edit ] Main article: Richardo-viner In the specific factors modellabor mobility among industries is possible while capital is assumed to be immobile in the short run.
Thus, this model can be interpreted as a short-run version of the Heckscher-Ohlin model.
The "specific factors" name refers to the assumption that in the short run, specific factors of production such as physical capital are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms.
New trade theory[ edit ] Main article: New trade theory New trade theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production i.I’m currently taking International Business as part of my MBA program at Rutgers, and decided to share my outline for what I’m studying at the moment – international trade theory.
All of the economic theories of international trade suggest that it enhances efficiency. In this regard, international trade is like a new technology. It adds to the productive capacity of all .
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. Adam Smith and David Ricardo gave the classical theories of international trade. According to the theories given by them, when a country enters in foreign trade, it benefits from specialization and efficient resource allocation.
In most countries, such trade represents a significant share of gross domestic product (GDP).