Theories of International Trade- Countries Based Management YouTube Lecture Handouts

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Theories of International Trade- Countries Based Management

Meaning of International Trade

  • Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever seen, housing more than 50000 people within its six miles of wall Uruk, its agriculture made possible by irrigation canals, was home to the first-class middlemen, trade intermediatories. A cooperative trade networks. Set the pattern that would endure for next 6000 years Matt Ridley.
  • When there is an exchange of goods and services between various countries for the purpose of growth and development. It is simply called international trade.
  • There have been many beliefs regarding how international trade takes place or should take place. It is simply called Trade Theories.

Theories

Classical Country-Based Theories

Mercantilism

  • It was prominent in the sixteenth century. It was believed that a country should increase it gold and silver reserves by exporting as much as it can and it believed in protectionism. Meaning imports should be restricted.
  • A closer look at the world history form 1500s to the late 1800s helps explain why mercantilism flourished. The 1500s market the rise of new nation state, who rulers wanted to strengthen their armies and national institutions. They, by increasing exports and trade, were able to amass more gold and wealth for their countries.

Theory of Absolute Advantage

  • It was propounded by Adam Smith in his famous book “The wealth of nations.” He basically talked about two countries which can trade if one country produces more efficiently in one of the goods.
  • So, he talked about two goods, two countries, one factor of production i.e.. , labour. He strongly advocated the policy of laissez faire i.e.. , free trade.

Theory of Comparative Advantage

  • It was given by David Ricardo in 1817.
  • Ricardo reasoned that even If A country has an absolute advantage in both the goods. It can still trade with the other country having absolute disadvantage in both the goods.
Table Supporting: Theory of Comparative Advantage
Country ACountry B
Wheat⟋hr.81
Cloth⟋hr.42
  • We can see that country B has relatively less disadvantage in producing cloth as in case of wheat it produces just 1 in one hour but in case of cloth it can produce at least 2 in one hour.
  • This theory also has two goods, two countries and one factor of production i.e.. , labour.

Heckscher Ohlin Theory or Modern Theory

It was proposed by Eli Hecksher, Bertil Ohlin in the early 1900s. They believed that any country can gain competitive advantage even if the labour is costly but its other factors of production are cheap. The other factors of production include land, capital and entrepreneurship. However, its exception was seen in America by Leontief and therefore called Leontiff Paradox.

MCQs

What is exception of Hecksher Ohlin Theory?

1. Theory of opportunity

2. Absolute Advantage

3. Leontiff Paradox

4. None of the above

Answer: 3

Strategy of Protectionism is followed in which theory?

1.Comparative advantage

2. Mercantilism

3. Absolute advantage

4. All of the above

Answer: 2

Manishika