Classical Theory Of International Trade

1130 Words3 Pages

The development of the international trade patterns and the theories that try to describe these patterns are analysed in this essay. With special focus on major international trade streams in each period of time, the Classical Theory, the New Trade, and Contemporary International Trade Theories are described. In the pre-World War I period the data show us that the majority of the international trade were represented by dissimilar goods traded between developed and developing countries. More precisely, home developed countries like United Kingdom or Spain who owned enough capital for manufacturing, traded with developing countries (colonies) that were rich for natural resources but lacked the capital for manufacturing. The majority of the international …show more content…

Newly the bulk of international trade was between developed countries and the traded goods were only partly diversified and therefore we can speak about similar-similar trade or also intra-industry trade, for example similar cars of different brands. What happened was that firms that had been earlier very similar with barely any market power grown in size and also its market power if they had over performed other companies. In other words couple of successful companies was able to become oligopolies and set the price. Under the assumption of oligopolistic competition (or more restrictive assumption of monopolistic competition which expects that all the oligopolistic companies are the same) the New Trade Theory was introduced. This theory described well reasoning behind the international intra-industry trade which accounted majority of the international trade after the WW II until about 1990. The importance of geographical location, transportation costs and mobility of production factors were taken into account and described clustering effect as a self-forcing process due to economies of scale and positive externalities but sometimes also as an historical accident. Another important role played the formation of trade unions like for example the European Common market that removed many trade barriers and enhanced the international trade. Trade unions but also lower transportation costs which resulted mainly because of the technological progress provided access to new markets again and many multinational corporations took an advantage of it. There are couple of reasons why such companies were successful: enough capital for international expansion, extraordinary products, economies of scale, oligopolistic power… Trade between rich countries and similar-similar goods in this period was in line with the suggestions of the Gravity

Open Document