October, 2018

International Trade Theory and Policy

1. What is a Theory?

- A theory is a group of ideas to explain a certain

phenomenon/a
- Typically, a theory is developed through the use of
contemplative (looking at thoughtfully, reflecting
deeply on a subject, or observe deep in thought) and
rational forms of abstract and generalized thinking
- A theory is often based on general principles that are
independent of the thing being explained
- A theory is not the same as a hypothesis. A theory
provides an explanatory framework for some
observation and from the assumptions of the explanation
follows a number of possible hypotheses that can be
tested in order to provide support for, or challenge, the
theory.
- A theory is a supposition or system of ideas intended to
explain something, especially one based on general
principles independent of the thing to be explained
- Theories are general propositions

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 - Theories can be used as principles of explanation and
prediction for a class of phenomena
- A theory is a proposed explanation whose status is
still subject to experimentation
Examples:
- In mathematics, we have a body of principles and
theorems about numbers – Number Theory
- In Economics, we have a body of principles and
theorems about how economic agents behave, etc.

2. What is a Hypothesis?

- A hypothesis is a proposed explanation of a phenomenon

which still has to be rigorously tested
- A hypothesis is specific and testable while a theory is
general and abstract. Testability is deciding whether it
is true or false. In other words, whether the theory can be
supported or falsified by the actual data.
- A different meaning of the term hypothesis is used in
formal logic. For example, in the proposition, “If P, then
Q”, P denotes the hypothesis (or antecedent) and Q is
called the consequent/conclusion
- If hypotheses are tested, the initial results may also be
labeled inconclusive

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 - Researchers, in weighing up alternative hypotheses,
may take the following into consideration:
i) Testability: whether the theory can be supported or
falsified by the actual data.
ii) Parsimony: among competing hypotheses the one
with the fewest assumptions should be selected.
That is, discouraging the postulation of excessive
number of entities.
iii) Scope: the apparent application of the hypothesis to
multiple cases of phenomena
iv) Fruitfulness: the prospect that a hypothesis may
explain future phenomena

3. What is International Trade?

International trade is the exchange of goods, services, and

capital across international borders or territories. In
many countries, such a trade represents a significant share
of GDP. While international trade has been present
throughout much of history, its economic, social, and
political importance has been on the rise in recent centuries.
Industrialization, advances in technology and
transportation, globalization, multinational
corporations, and outsourcing are all having major impact
on international trade system. What is outsourcing and
what are its purposes? Outsourcing is the contracting out
of a business process to a third party. It includes both

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 foreign and domestic outsourcing. For example, two
organizations may enter into a contractual agreement
involving an exchange of services and payments.
Outsourcing is said to help firms to perform well in their
core competencies and mitigate shortage of skill or
expertise in the areas where they want to outsource.
Companies primarily outsource to avoid certain costs –
such as peripheral or “non – core” business expenses, high
taxes, high energy costs, excessive government regulation,
production and labor costs.

4. What is Positive Economics?

It is that part of economic science which is concerned with

statements that are capable of verification by reference
to the facts. In other words, the statements should be
testable by reference to empirical evidence. Positive
economists argue that economic science should not
encompass statements that involve value and judgments,
such as, for example, “X is good or bad.”

5. What is Normative Economics?

It is an economic analysis which provides prescriptions or

statements about what “should be” rather than what ‘is”. In
other words, it involves value judgment. For example,

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 “monopolies should be regulated’ or “profits should be
taxed.”