International trade theories case of singapore

types of international trade theories

One result of these theories is the home-market effectwhich asserts that, if an industry tends to cluster in one location because of returns to scale and if that industry faces high transportation costs, the industry will be located in the country with most of its demand, in order to minimize cost.

He makes the argument that while it is possible to grow grapes and produce wine in Scotland, the investment in the factors of production would cost thirty times than more than the cost of purchasing an equal quantity from a foreign country.

After the appearance of Leontief's paradox, many researchers[ who?

International trade theories notes

Globalization and the Theory of Input Trade. Conversely, a decrease in the price of a product reduces the income of the resources that it uses intensively. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms Main article: Heckscher—Ohlin model In the early s, a theory of international trade was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. Innovation and Growth in the Global Economy. In the s this was a useful theory to explain the manufacturing success of the United States. The amount of labor and capital in two countries differ difference in endowments Technology is the same among countries a long-term assumption Tastes are the same upon countries Stolper-Samuelson theorem[ edit ] According to the Stolper-Samuelson theorem, the export of a product which is relatively cheap, abundant resource makes this resource more scarce in the domestic market. What are the modern, firm-based international trade theories? Leontief found out that the United States' exports were less capital intensive than its imports. The difference between these two theories is subtle.

This line of thought has brought Ricardo's theory of comparative advantage back to center stage. In a hypothetical two-country world, if Country A could produce a good cheaper or faster or both than Country B, then Country A had the advantage and could focus on specializing on producing that good.

Strategic trade theory examples

Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. While a simplistic definition, the factors that impact trade are complex, and economists throughout the centuries have attempted to interpret trends and factors through the evolution of trade theories. In Book IV of his major work the Wealth of Nations , Adam Smith, discussing gains from trade, provides a literary model for absolute advantage based upon the example of growing grapes from Scotland. In other words, if people in other countries buy more from you exports than they sell to you imports , then they have to pay you the difference in gold and silver. The theory assumed that production of the new product will occur completely in the home country of its innovation. Some countries have a disproportionate benefit of some factors. China Center for Economic Research.

Just as these theories have evolved over the past five hundred years, they will continue to change and adapt as new factors impact international trade. Leontief that states, in the real world, the reverse of the factor proportions theory exists in some countries.

Both of these categories, classical and modern, consist of several international theories.

international trade theories ppt

Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage.

MIT Press, Cambridge. It has also been used to describe how the personal computer PC went through its product cycle.

Modern theories of international trade

Global value chains[ edit ] Main article: Global value chain Revolutionary change in communication and information techniques and drastic downs of transport costs have enabled an historic breakup of production process. It also has extensive access to capital. Much work in international trade during the last decade has returned to the assumption that countries gain from trade because they have access to different technologies. Conversely, a decrease in the price of a product reduces the income of the resources that it uses intensively. Gadjah mada International Journal of Business. Certain industries cluster geographically, which provides efficiencies and productivity. Main article: Gravity model of trade The Gravity model of trade presents a more empirical analysis of trading patterns. Maule, Andrew. Describe how a business may use the trade theories to develop its business strategies. As it is fitted to big data age, the research produced many follows and the trend is now called New new trade theory in comparison to Paul Krugman's new trade theory. He stated that trade should flow naturally according to market forces. However, what remains clear is that international trade is complex and is impacted by numerous and often-changing factors. Country Similarity Theory Swedish economist Steffan Linder developed the country similarity theory A modern, firm-based international trade theory that explains intraindustry trade by stating that countries with the most similarities in factors such as incomes, consumer habits, market preferences, stage of technology, communications, degree of industrialization, and others will be more likely to engage in trade between countries and intraindustry trade will be common. In Book IV of his major work the Wealth of Nations , Adam Smith, discussing gains from trade, provides a literary model for absolute advantage based upon the example of growing grapes from Scotland. Chipman observed in his survey that McKenzie stumbled upon the questions of intermediate products and postulated that "introduction of trade in intermediate product necessitates a fundamental alteration in classical analysis".
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International trade theory