The Theory Of International Trade Theory Essay

The Theory Of International Trade Theory Essay

Length: 723 words (2.1 double-spaced pages)

Rating: Better Essays

Open Document

Essay Preview

Specialization has been firstly established by Adam Smith theory, the absolute advantage. It is a method of production where a business focuses on one limited scope of products or services in order to gain productive efficiency within the entire system of businesses. Many countries, for instance, specialize in producing the goods and services that are native to their part of the world. On the other hand, incomplete specialization still exists with the modern theory, a result of the pure theory of international trade based on two-factors, two-goods Heckscher-Ohlin models. There are factors that make the specialization imperfect in practice; such as, endogenous growth, transportation cost, immobility, and interdependency.
In 1994, Klaus Walde studied two-factors, two-goods Heckscher-Ohlin trade theory. Although Walde specified the model for two countries with identical size, the absence of factor-price equalization holds for any factor endowment which allows for an incomplete specialization of both countries. The factor prices do not equalize because the assumption of different individual discount rates and possible since one of the two goods is a differentiated product produced under monopolistic competition which does not require an equalization of goods prices due to international trade.2 In addition, the endogenous growth will cause the absence of factor-price equalization which allows for an imperfection of specialization. Walde’s research also provides some mathematic functions to support this conclusion. However, the endogenous growth is not the only factor that contributes to imperfect specialization in international trade.
Transportation cost is an obstacle to trade and impede the realization of gains from trade liberaliz...

... middle of paper ...

...roduce goods or services at a lower opportunity cost than other firms or individuals, economic interdependence will scare some countries to specialize in something and dependently import something else from the other countries. In conclusion, interdependence will contribute imperfect specialization in international trade.
These factors are clearly represented the factors that cause incomplete specialization. There are so many researches supporting these factors as this essay has discussed. Furthermore, the example can be found recently between countries. However, the factors that contribute to imperfect specialization in international trade in this essay are only majorities. There are many minor factors that might not been found or they might be too complicated to proof. Some factors might relate to the other factors, which impossible to be extracted from each other.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Essay Adam Smith Free Trade International Trade Theory

- The core of Adam Smith Free Trade International Trade Theory is all parties involved in trade have received trade benefits in the free trade transactions. Adam Smith thinks different countries produce the same product with different costs; the country should produce the definite low cost products instead of absolute high products. The products can be exchanged with other countries, so that the two countries will increase labor productivity and decrease the costs. Obviously, labor and capital can be properly distributed and utilized....   [tags: International trade, Economics, Economic growth]

Better Essays
1789 words (5.1 pages)

The Mercantilist Theory Of International Trade Essay

- The Mercantilist theory was the first theory of international trade and is one of the foundation stones of modern economics. Mercantilism arose in England in the mid-sixteenth century and prevailed through the eighteenth century and it consisted in a political and economic system that purports that the strength of a country is directly connected to its capacity to maintain a positive balance of trade. Therefore countries should encourage exports and discourage imports in order to be economically and politically viable....   [tags: International trade, Mercantilism]

Better Essays
1423 words (4.1 pages)

Essay on Free Trade Theory And International Political Economy Discipline

- Free trade theory, in the international political economy discipline, was encouraged in the tenth century by David Ricado, the British political economist, who created the theory of comparative advantage which demonstrates that every state could benefit from trade liberalization by specializing products and services which they are able to make best even if it may be not better than other states (O’Brien and Williams, 2013). Thus, even low income developing countries will also gain benefits from free trade....   [tags: International trade, Free trade]

Better Essays
1257 words (3.6 pages)

Literature Review : Trade Theory And International Division Of Labor Theory

- I. Literature review of a several outstanding trade theory 1. Heckscher-Ohlin Model Heckscher-Ohlin Model (or H-O Model), developed by Eli Heckscher and Bertil Ohlin, is a general equilibrium mathematical model in international trade theory and international division of labor theory. This model, built on the theory of David Ricardo about comparative advantage, is used to predict which goods are produced by different countries with given factors. H-O model states that a country will export goods requiring factors of production which are abundant in that country, and, otherwise, import goods with input factors that are scarce....   [tags: International trade, Economics]

Better Essays
928 words (2.7 pages)

Free Trade Theory : The Basic Foundation Of International Trade Essay

- Importing and exporting, goods and services forms the basic foundation of international trade. Each domestic market has its own agenda in regards to wants and needs which ultimately leads to conflict regarding interests and how to proceed when conducting business. Costs may arise when competing nations implement their own polices to try and gain an edge in the market, this can be risky if no action is taken by domestic industries. Government intervention is thus critical when considering how the environment can be managed to ensure domestic markets are still reaping benefits whilst fighting off potential risk....   [tags: International trade, Mercantilism, Free trade]

Better Essays
1858 words (5.3 pages)

The Theory of International Trade Essay

- Free Trade The concept of that all countries will be benefited from the international, no matter what the circumstances are, that was one of the facts that all economists have been talking about. The theory of international trade relied on comparative advantage; the well-known feature that advantages countries took a part in the commercial trade. But the traditional theory of international trade, forced some of restricted conditions to the analysis of the international trade, for example, the concept of perfect competition and constant returns....   [tags: monopoly, free trade]

Better Essays
860 words (2.5 pages)

The Theory Of International Trade Essay

- (i) The main arguments of the author. The article has several argument, following are more stand out point: 1) The theory of international trade cannot provide a proper explanation of why international economic inequalities exist in the trade. Moreover, the current tendencies show that those inequalities are growing, and also those processes cannot be explained with the theory of international trade. 2) The movements of labor, resources and capital between countries are huge, but they do not lead to equalization, though they should according to the theory....   [tags: Economics, Economy, Economic inequality]

Better Essays
956 words (2.7 pages)

Krugman's Is Free Trade Passe? Essay

- Krugman writes that in the decade preceding his article “Is Free Trade Passé?” international trade theory underwent radical change from the traditions of constant returns and perfect competition to include new models emphasizing increasing returns and imperfect competition (1987, p. 131). Comparative advantage is no longer accepted as a means to explain in totality what actually happens in trade, and extraneous factors indicate that free trade may not be in the best interest of individual nations....   [tags: International Trade Theory, Free Trade]

Better Essays
1098 words (3.1 pages)

The New Trade Theory Essay

- ... The industry generated a total revenue of $6.1 billion in the year 2002 (ALRC 2014). The research and development of the pharmaceutical industry is very important as the industry relies on it to develop new products to maintain and sustain the growth of the industry (ALRC 2014). According to the Australian Government Law Reform Commission, every year, the total spending in research and development in pharmaceutical industry, which includes drug discovery, pre-clinical testing and clinical trials on drugs is around $300 million (ALRC 2014)....   [tags: international trade, pharmaceutical industry]

Better Essays
1330 words (3.8 pages)

International Trade Relations Essay

- The Heckscher-Ohlin theory of comparative advantage was produced as an alternative to the Ricardian model and had an ideological mission: the elimination of the labor theory of value and the incorporation of the neoclassical price mechanism into international trade theory. The empirical validity of the Heckscher-Ohlin model and argues that most of the empirical work aimed at proving the validity of the model by focusing on its power to predict trade patterns is irrelevant. Moreover, the dynamic version of the model, which predicts dynamic structural change in the long run, is based on simple empiricism....   [tags: Theory Comparison Heckshcer-Ohlin Ricardian]

Free Essays
1312 words (3.7 pages)