Summary: Theories of Trade

 This chapter presents the main theories that develop over time to explain the occurrence of
international trade following a brief overview of trade benefits, volume, and patterns.
International Trade refers to the exchange of products and services from one country to
another. In other words, imports and exports. Mercantilism state that nations should
accumulate financial wealth, usually in the form of gold, by encouraging exports and
discouraging imports. Absolute advantage states that a nation should concentrate in the
production and export of those product in which it has an absolute advantage and import
products it needs but does not produce. Comparative advantages states that trade will still
benefit two countries even if one country is a less efficient producer. Factor proportions theory
states that countries produce and export goods that require resources that are abundant and
import goods that require resources in short supply. Heckscher ohlin-theory in economics, a
theory of comparative advantage in international trade according to which countries in which
capital is relatively plentiful and labor relatively scares will tend to export capital-intensive
products and import labor-intensive products, while countries in which labor is relatively
plentiful and capital relatively scarce will tend to export labor-intensive products and import
capital relatively scares will tend to export labor-intensive products and import capital-intensive
products. The international product life cycle theory states that a company will begin by
exporting its product and later undertake foreign direct investment as the product moves
through its life cycle. The new theory argues that 1) there are gains from specialization and
increasing economies scale. 2) companies first in a market create barriers to entry. 3)
government can assist their home-based companies. The IPLC International trade cycle consists
of three stages 1)new product, 2)maturing product and 3)standardized product.