Theories of trade i easy way

Priya gulani

Theories of International Trade Theory of Mercantilism (1630: Thomos Mun): This theory suggests that it is in the country’s best interest to maintain a surplus of trading services i.e. to export more than its imports. Trade surplus can be defined as an excess of export over import. Theory of Absolute Advantage (1776: Adam Smith): It explains that a country having an absolute cost advantage in the production of the product on account of greater efficiency should specialize in its production and export. A country has an absolute advantage if it can produce the same quantity of goods and more efficiently than any other country. Theory of Comparative Advantage (1817: David Ricardo): This theory explains that a country should specialize in the production and export of a commodity in which it possesses the greatest relative advantage. Theory of Reciprocal Demand (1844: J.S. Mill): According to J.S. Mill, the equilibrium trade terms are decided by the equation of reciprocal demand. Reciprocal demand suggests that relative strength and snap of demand of the 2 mercantilism countries for every other’s product in terms of their own product. A stable quantitative relation of exchange are going to be determined at a level where the value of imports and exports of every country is in equilibrium. Factor Proportions Theory or Heckscher-Ohlin theory(1919: Eli Heckscher and Bertil Ohlin): This theory explains that a country should produce and export that commodity which primarily involves a factor of production abundantly available within the particular country. Leontief Paradox: A study was conducted by Wasily-Leontief in 1953, where he tested the validity of the Heckscher-Ohlin theory. It refers to the empirical evidence based on US export of labour- intensive goods challenging the factor endowment theory. Porter Diamond Theory of National Advantage (1990: Michael Porter): It refers to the factors responsible for maintaining a nation’s competitive advantage, as explained by the porter. there are many theories of international trade but these are the important ones