International Trade:

A Summary Discussion of Three

Trade Theories

Austin Sams Udeh

Table of Content

1.0 International Trade ............................................................................................................................. 2

2.0 International trade theory ................................................................................................................... 2
2.1 Ricardian Model................................................................................................................................ 2
2.2 Specific-Factor Model....................................................................................................................... 3
2.3 Heckscher -Ohlin Endowment Theory ............................................................................................. 3
3.0 Conclusion ........................................................................................................................................ 4
4.0 References ....................................................................................... Error! Bookmark not defined.
1.0 International Trade

This is a trade between two or more countries. It is argued that such trade between the nations give
rise to mutually beneficial gains. Nations (or firms in different nations) trade with each other
because they benefit from it. Other motives may be involved, of course, but the basic motivation
for international trade is that of the benefit, or gain, to the participants. The gain from international
trade, like the gain from all trade, arises because specialization enables resources to be allocated to
their most productive uses in each trading nation.
The major reasons offered for why countries engage in international trade include;

• Differences in resource endowments

• Differences in technology
• Differences in demand
• Existence of government policies
• Existence of economies of scale in production

2.0 International trade theory

Generally, the idea that international trade not only necessary but provide mutual benefits or gains
for nations started with the classical economists of the late 18th and 19th centuries (e.g., Adam Smith,
David Ricardo etc). Some of the formalized theories on trade include;

• Ricardian Model
• Specific Factor Model
• Heckscher – Ohlin Model

2.1 Ricardian Model

This is the most simplified explanation of international trade developed by David Ricardo in his
Principles of Political Economy (1817). He argued that absolute cost advantages as proposed by Adam
Smith are not a necessary condition for two nations to gain from trade with each other. Instead, trade
will benefit both nations provided only that their relative costs, that is, the ratios of their real costs in
terms of labour inputs, are different for two or more commodities. In short, trade depends on differences
in comparative advantage, and one nation can profitably trade with another even though its real costs
are higher (or lower) in every commodity.

Ricardo’s labour productivity and comparative advantage clearly illustrates the potential benefits to
nations engaging in trade. Arguing further, Ricardo noted that trade leads to international specialization,
with each country shifting its labor force from industries in which that labor is relatively inefficient to
industries in which it is relatively more efficient for overall increase in productivity.

This model considered only labour as factor of production and also assumed that labour can move freely
from one industry to another, and that there is no possibility that individuals will be hurt by trade.
Ricardian model thus suggests not only that all countries gain from trade, but also that every individual
is made better off as a result of international trade, because trade does not affect the distribution of
income. However, in the real world, trade has substantial effects on the income distribution within each
trading nation, so that in practice the benefits of trade are often distributed very unevenly.
2.2 Specific-Factor Model

The theory was developed by Paul Samuelson and Ronald Jones to offer explanation on the working of
international trade. Unlike the simple Ricardian model where only labour was considered as the factor of
production and that it can more freely between two sectors, specific factors model allows for the existence
of factors of production besides labour. It considers other specific factors other than labour such as capital.
According to Samuelson and Jones, while labour is a mobile factor that can move between sectors, these
other factors are assumed to be specific.

The underlying explanation is that a factor of production is specific to an industry, or immobile, when its
productivity in one industry exceeds its productivity in other industries at any price. The model predicts that
immobile factors that produce import-competing goods will be harmed by free trade. Essentially, to a large
extent, as a specific factor capital is immobile between industries, while labor is mobile and can be used only
in the production of particular goods or services. The model went further to illustrate how comparative
advantage from these specific factors determines the pattern of international trade.

This theory of course deals with natural endowments using two specific variables Labour & Capital. The
theory insinuates that when a country is endowed with a certain factor over the other then the country tends
to trade with what it is less endowed with to reduce deficits. Once again the model proves the minister wrong
because using this model, exporters are not a problem, rather it is failure of countries to objectively identify
gaps and loopholes within the economy to practically fill with exports.

The idea of trade is not to aimlessly buy, nor involve in actively bullying the local market, imports are
supposed to ease the markets and fill the areas of lack without necessarily involving in large capital
expenditure. In the case of Nigeria, the effects of corruption has eaten deep into many aspects of the economy
including international trade.

2.3 Heckscher -Ohlin Endowment Theory

The theory was developed by Swedish Economists; Eli Heckscher and Bertil Ohlin, popularly
referred to as Heckscher–Ohlin endowment theory. The model was designed for the analyses of
pattern of international trade from the perspective of endowment.

H-O framework was found to be a useful approach for trade analysis. Not only to predict how a
country’s pattern of trade may change as its factor endowments change, but also to explain how
trade benefits abundant factors used intensively in export production and hurts scarce factors used
intensively in import-competing production.

The theoretical completeness of this model makes it attractive, unfortunately, it appears to be most
applicable in explaining trade between countries with dissimilar endowments, as in the case of
industrialized versus developing countries. However, one notable weakness with the model was its
inability to provide a coherent explanation of the large volume of trade among industrialized
countries.

This final model deals with the correlation in trade between countries with factor abundance (land
labor and capital). This theory states that the only factor in which exports affect local markets is in
the area of either price reduction or price increase. Thus as long as the price is competitive the
local and foreign markets ought to have a fair relationship where no one is worse off.
3.0 Conclusion

The models above offers useful explanation of international trade from different theoretical lens on
the gains and other issues associated with countries engaging in international trade. There is nothing
wrong generally with trade as the Minister painted rather it is the approach or pattern a nation takes
to engage in trade that may call for concern.
Therefore, the statement credited to the Hon. Minister from the foregoing was ambiguous and was meant
to restate the obvious need by government to protect the local infant industries likely to affected by
trade.
References
Adefele, A. A., (2015). Towards the development of world trade Business: Africa
perspective, 1st edition, Dalenton Press limited.
Adesua, D. F., (2012). The Element of International Trade, 1st edition, JSK Press Limited, Lagos,
Nigeria.