International Trade Theories Assignment Example | Topics and Well Written Essays - 2750 words

International plenty Theories - Assignment ExampleA brief discussion of the classical trade theories will provide a backdrop of the detailed examination of the modern trade theories and how these could be viewed in the present patterns of international trade. unadulterated theories Mercantilism During the 17th and 18th centuries, the system of commerce was widely practised in international trade. Essentially, mercantilism saw international trade as a zero-sum proposition. French statesman Jean-Baptiste Colbert, who pioneered this theory, believed that the wealth of the adult male was fundamentally fixed and that trade was a closed system, so that those nations which exported more and imported less acquires more of the worlds wealth and becomes richer, and vice-versa. While mercantilism is the oldest of the trade theories, this does not mean that it is obsolete. Even today, the effects of mercantilism are evident in policies of trade protectionism, and makes the argument that rat her than import from other countries and risk a trade deficit, a country would be economically better off if it were self-sufficient (Peng, 2010, p. 149). Absolute favour Advocated in 1776 by British economist Adam Smith, the theory of absolute advantage stated that the thrust of the openhanded market should best determine the economic activities of a nation and, inclusively, the level of international as well as domestic trade. Smiths theory of free trade ( too called laissez faire) relied on forces of the free market to operate unrestricted, to enable free trade to seek out the most efficient fashion for value creation. The absolute advantage in the creation of a product or service is that which is achieve by the nation that is able to produce that good or service most efficiently. The implication of this theory is that (1) the principle of self-sufficiency is best abandoned because no country could efficiently produce all goods and serve and (2) countries would best speciali ze in production of good and services where they have the advantage. International trade ceases to be a zero-sum case, and becomes a win-win proposition. Comparative advantage In 1817, British economist David Ricardo actual the theory of comparative advantage. The theory saw the ability of countries to efficiently produce goods and services not in absolute basis but in relation to which country they trade with. Comparative advantage is the relative advantage in one economic activity possessed by one nation over other nations. top gains from trade may be realized when countries specialize in producing goods and services where they have comparative advantage. in that respect is a trade-off, however, known as the opportunity cost, which is the cost incurred by a producer in choosing to overstep up production of a good or service in favour of concentrating on another(prenominal) (p. 152). The three foregoing theories, while useful in conceptualizing trade relations, make the neces sary but unreal assumption that trade is static. Through time, factor endowments and trade patterns change, necessarily debunking the theory that trade is static. This gave modal value to the modern trade theories of the mid-twentieth century, also known as the dynamic theories, which aim to account for the change in trade patterns over time. New theories Product life cycle Product life cycle was developed by Raymond Vernon, an American economist, in 1966. Vernon saw the worlds trading nations as consisting of three categories (1) the speck innovation nation which is usually assumed to be the US, (2) other developed nations, and (3) the developing nations. Aside from distinguishing among the nations, Vernon also classified products according to three life cycles (1) new, (2) maturing, and (3) standardized. New products commanded a higher price (price premium)