¶ … Evolution of International Trade From Static to Dynamic Theories
Evolution of International Trade
Generally, the principles governing the gains from trade can apply in both foreign and domestic trade. Although there is a tendency by states to view the two elements as different, economists on the other hand, suggest that the consequences of international trade were an extension of the laws governing domestic trade. Some of these principles were established very early, but a number of economists, for instance, John Stuart satisfactorily showed that it was possible to use similar principles to explain international and domestic trade. Therefore, economists are now confident that questions pertaining trade are similar, for instance, what is the advantage of trade between two parties? Between regions or countries? If individuals were self-sufficient, and can produce food, cloth or shelter, the living standards would be very low (Appleyard, Field and Cobb, 2005).
On the other hand, if people do not have such capacities to produce food, or access some basic items, this would call for trade between the individuals. Therefore, trade will let people to be in a position of specializing in things they can produce, but buy from other people the things that they cannot produce. Owing to this, it is apparent that trade and specialization have a substantial relationship. This principle provides the basis of all other forms of trade among countries, locals and regions. Specialization is the case that applies in international trade, where a given country has the capacity to produce particular things, whereas others cannot. In order to enjoy the things produced by a certain countries, the two or parties involved engage in trade. Although this is the case before the emergence of modern economies, economists strongly believed that trade was beneficial when it resulted to an export surplus (Smithies, 1952).
Models of International Trade
Ricardian Model
The Ricardian approach suggests that specialization has the capacity to maximize the national income of countries involved in international trade; however, it does not explain how they will find the equilibrium prices when they engage in trade. Nevertheless, the theory assumes that if consumer countries engaging in trade have different tastes, it is possible that they will not take part in trade (Choi, 2002). For instance, if the consumers in the respective countries like their local beers, there is no need to take part in international trade of beers. Therefore, the approach assumes that the consumers have similar tastes globally; it is possible that trade may not occur if the transport costs are high (Bittante, 2013). Globally, the transportation costs, especially when they are high can serve as barriers to international trade (Appleyard, Field and Cobb, 2005).
In addition, the approach assumes zero transport costs, and considered trade based on comparative advantages (Appleyard, Field and Cobb, 2005). Although this theory offers substantial information in relation to trade, some of the assumptions provided have been proven wrong by empirical evidence. For instance, it is apparent that the principles of trade are similar, both locally and internationally (Choi, 2002). This is one area where the approach refutes it suggests that what was true for the local market was not true for the international setting. It further suggests that in international trade, firms that have a comparative advantage do not necessarily have the advantage. In addition, in an attempt to justify this, the approach postulates that there are different set of laws governing the international trade, whereas it is apparent, that trade is central to similar principles.
H-O Model
Eli-Heckscher (in an article published in 1919) and Bertil Ohlin (a student who used the ideas of Hechscher in his 1924 dissertation) developed the Heckscher-Ohlin (HO). In comparison to the Ricardian approach, this model uses a realistic framework because it allowed a second factor of production, which was in the form of capital. It postulates that production possibility frontier is going to be concave, which will result to increase in the opportunity costs. Therefore, there is no likelihood of complete specialization, and trade will cause redistribution of income between capital and labor. The approach further suggests that a country will export goods, especially the goods that use its abundant factor intensively (Giri, 2006). For example, Canada has ample land; this is a satisfactory explanation as to why Canada exports agricultural products.
Nevertheless, the model assumes that production functions that are similar in countries differ in factor-intensities. In addition, it assumes that there is no factor-intensity reversal for the involved countries (Appleyard and Field, 2005). The model makes a positive contribution to economics, and its scientific attempt to offer an explanation about the international trade is apparent because it reveals the base of the international trade, which is in the factor...
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