INTERNATIONAL

TRADE THEORIES

GROUP 1
It refers to the trade
that places across
national borders. It is
the means through
which countries
exchange goods with
each other and is
served as an important
means of survival for
many countries.
These are various
theories that analyze
and explain the
patterns of
THEORIES
international trade.
These theories explain
the mechanism of
international trade that
is how countries
exchange goods and
services with each
other.
 ABSOLUTE ADVANTAGE THEORY
(ADAM SMITH, 1776)
This theory says that countries should
focus on producing such products that they
can produce efficiently at a lower cost as
compared to other countries.
Manufacturing a product in which a
particular country specializes is quite
advantageous for them. Countries should
produce and export such products which
can produce efficiently and import those
goods that they produce relatively less
efficiently.
COMPARATIVE ADVANTAGE THEORY
(DAVID RICARDO, 1817)

If a country cannot produce goods more

efficiently than other countries then it
should only produce such goods in which
it is most efficient. Countries should
specialize and export such products in
which it has a less absolute disadvantage
as compared to other products.
COMPARATIVE ADVANTAGE THEORY
(DAVID RICARDO, 1817)
 HECKSCHER-OHLIN THEORY
(ELI HECKSCHER & BERTIL OHLIN)

It is also called as factors proportions

theory and states that the country will
produce and export those products whose
production require those factories which
are in great supply in-country and have
low manufacturing cost. Whereas it will
import all such goods whose production
requires nation’s scarce and expensive
factors and have high demand.
MERCANTILISM THEORY
(1630)

Mercantilism theory states that nation’s

wealth is determined by its gold and silver
holdings. Every nation in order to increase
its economic strength should increase its
gold and silver accumulation. It says that
nations should favor export which leads
to inflow of gold whereas they should
disfavor import which lead to the outflow
of gold.
MERCANTILISM THEORY
(1630)
MERCANTILISM THEORY
(1630)
 PRODUCT LIFE CYCLE THEORY
(RAYMOND VERNON, 1970)

It says that initially new products will be

produced and exported from the home
country of its innovation. Later on, when
demand for the product grows country
will undertake foreign direct investment in
other countries and open several
manufacturing plants to meet the request.
Both locations of production and sales of
product changes along with its life cycle or
as product get matured.
PRODUCT LIFE CYCLE THEORY
(RAYMOND VERNON, 1970)

Stages of Product Life

Theory
Stage 1: Introduction
Stage 2: Growth
Stage 3: Maturity
Stage 4: Decline
NATIONAL COMPETITIVE ADVANTAGE THEORY
(MICHAEL PORTER, 1990)

This theory state that national

competitiveness in a particular industry
will depend upon the environment that
such industry is getting in the home
country. The main source of innovation
and up-gradation for such industry is
basically the environment in which they
operate which helps countries in getting a
national competitive advantage.
NATIONAL COMPETITIVE ADVANTAGE THEORY
(MICHAEL PORTER, 1990)

Porter determined four factors as determinants of national

competitive advantage of the nation.
• Local market resources and capabilities,
• Local market demand,
• Local suppliers and complementary industries
• Characteristics of local firms.