The Theory Of International Trade Theory Essay

The Theory Of International Trade Theory Essay

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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...


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...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.

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