Classical And Modern Theories Of International Trade

Classical And Modern Theories Of International Trade

Introduction

International Business can be defined as a type of business by an individual, firm or company across national boundaries. One of the important modes of International business is International trade. The word trade means the exchange of goods and services between the person or entities. International includes import and export between the different in the world. To understand the concept of international trade, one has to gain knowledge about different theories given by different economists.

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Categorization of Theories of International Trade.

The theories of International trade are categorized into two categories which are depicted below.

A) Classical Country – Based Theories

• Name Of Theory: Mercantilism Theory  
• Author’s Name: Adam Smith  
• Year: 1590  
• Assumptions: The Country’s wealth depends upon the gold and silver reserves of the country. The country should encourage exports and discourage imports to archive the objective of economic prosperity.

• Name Of Theory: Absolute Advantage Theory  
• Author’s Name: Adam Smith  
• Year: 1776
• Assumptions: The country must produce that product that it can make more efficiently as compared to other countries.  

• Name Of Theory: Comparative Advantage Theory  
• Author’s Name: David Ricardo  
• Year:1817  
• Assumptions: The country must produce that product that it can make more efficient as compared to that product which is made by the same country inefficiently.  

• Name Of Theory: Factor Proportions Theory  
• Author’s Name: Heckscher and Bertil Ohlin  
• Year: 1900  
• Assumptions: The country must produce that product for which the supplies of resources are abundant.

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B) Modern or Firm-Based Theories

• Name Of Theory: Country Similarity Theory  
• Author’s Name: Steffan Linder  
• Year:1961  
• Assumptions: Two countries must involve in International trade when their customer’s preferences and tastes are similar to each other.  

• Name Of Theory: Product Life Cycle Theory  
• Author’s Name: Raymond Vernon  
• Year:1960  
• Assumptions: The product life cycle has three distinct stages (1) New product(2) Maturing product(3) Standardized product. The country must produce a product that is a new product stage domestically.  

• Name Of Theory: Global Strategic Rivalry Theory  
• Author’s Name:Paul Krugman and Kelvin Lancaster  
• Year:1980  
• Assumptions: MNC’s experience global competition in the global market and must have a competitive advantage in order to survive in this competition.  

• Name Of Theory: National Competitive Advantage Theory  
• Author’s Name: Michael Porter  
• Year:1900  
• Assumptions: The countries competitive strength depends upon the level of innovation and up-gradation brought by a particular firm in a specific industry.  

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Conclusion 

The knowledge about these theories of International trade helps the government and businessmen to promote, regulate and manage International trade between different countries of the world. These theories are relevant occasionally to the real-world situation.