Adam Smith claimed that a country should specialise in, and export, commodities in which it had an absolute advantage. An absolute advantage existed when the country could produce a commodity with less costs per unit produced than could its trading partner. By the same reasoning, it should import commodities in which it had an absolute disadvantage,.
While there are possible gains from trade with absolute advantage, comparative advantage extends the range of possible mutually beneficial exchanges. In other words it is not necessary to have an absolute advantage to gain from trade, only a comparative advantage.
Comparative cost advantage (David Ricardo, 1817)
Main articles: Comparative advantage and Ricardian economics
David Ricardo argued that a country need not have an absolute advantage in the production of any commodity for international trade between it and another country to be mutually beneficialAbsolute advantage meant greater efficiency in production, or the use of less labor factor in production.Two countries could both benefit from trade if each had a relative advantage in production.Relative advantage simply meant that the ratio of the labor embodied in the two commodities differed between two countries, such that each country would have at least one commoditiy where the relative amount of labor embodied would be less than that of the other country.
Gravity model of trade (Walter Isard, 1954)
Main article: Gravity model of trade
The gravity model of trade in international economics, similar to other gravity models in social science, predicts bilateral trade flows based on the economic sizes of (often using GDP measurements) and distance between two units. The basic theoretical model for trade between two countries takes the form of:
with:
: Trade flow
: Country i and j
: Economic mass, for example GDP
: Distance
: Constant
The model has also been used in international relations to evaluate the impact of treaties and alliances on trade, and it has been used to test the effectiveness of trade agreements and organizations such as the North American Free Trade Agreement (NAFTA) and the Worl Trade Organization (WTO).
Heckscher-Ohlin model (Eli Heckscher, 1966 & Bertil Ohlin, 1952)
Main article: Heckscher-Ohlin model
The Heckscher-Ohlin model (H-O model), also known as the factors proportions development, is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries will export products that utilize their abundant and cheap factor(s) of production and import products that utilize the countries' scarce factor(s).
The results of this work has been the formulation of certain named conclusions arising from the assumptions inherent in the model. These are known as:
Heckscher-Ohlin theorem
Rybczynski theorem
Stolper-Samuelson theorem
Factor-Price Equalization theorem
Leontief paradox (Wassily Leontief, 1954)
Main article: Leontief paradox
Leontief's paradox in economics is that the country with the world's highest capital-per worker has a lower capital:labour ratio in exports than in imports.
This econometric find was the result of Professor Wassily W. Leontief's attempt to test the Heckscher-Ohlin theory empirically. In 1954, Leontief found that the U.S. (the most capital-abundant country in the world by any criteria) exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory.
Linder hypothesis (Staffan Burenstam Linder, 1961)
Main article: Linder hypothesis
The Linder hypothesis (demand-structure hypothesis) is a conjectue in economics about international trade patterns. The hypothesis is that the more similar are the demand structures of countries the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowments (relying on specialization to create a comparative advantage in the production of differentiated goods between the two nations).
Location theory
Main article: Location theory
Location theory is concerned with the geographic location of economic activity; it has become an integral part of economic geography, regional science, and spatial economics. Location theory addresses the questions of what economic activities are located where and why. Location theory rests — like microeconomic theory generally — on the assumption that agents act in their own self interest. Thus firms choose locations that maximize their profits and individuals choose locations, that maximize their utility.
Market imperfection theory (Stephen Hymer, 1976 & Charles P. Kindleberger, 1969 & Richard E. Caves, 1971)
Main article: Market failure
In economics, a market failure is a situation wherein the allocation of production or use of good and services by the free market is not efficient. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that can be improved upon from the societal point-of-viewThe first known use of the term by economists was in 1958but the concept has been traced back to the Victorian philosopher Henry Sidgwick.
Market imperfection can be defined as anything that interferes with tradeThis includes two dimensions of imperfectionsFirst, imperfections cause a rational market participant to deviate from holding the market portfolioSecond, imperfections cause a rational market participant to deviate from his preferred risk level.Market imperfections generate costs which interfere with trades that rational individuals make (or would make in the absence of the imperfectionThe idea that MNEs owe their existence to market imperfections was first put forward by Hymer, Kindlebergr and CavesThe market imperfections they had in mind were, however, structural imperfections in markets for final products.According to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentationbut in their absence markets are perfectly efficientBy contrast, the insight of transaction costs theories of the MNEs, simultaneously and independently developed in the 1970s by McManus (1972), Buckley and Casson (1976), Brown (1976) and Hennart (1977, 1982), is that market imperfections are inherent attributes of markets, and MNEs are institutions to bypass these imperfections. Markets experience natural imperfections, i.e. imperfections that are due to the fact that the implicit neoclassical assumptions of perfect knowledge and perfect enforcement are not realized.
New Trade Theory
Main article: New Trade Theory
New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing returns to scale and the network effect. Some economists have asked whether it might be effective for a nation to shelter infant industries until they had grown to a sufficient size large enough to compete internationally.
New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market (via a Network effect).
Specific factors model
Main article: International trade#Specific factors model
In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. Thus, this model can be interpreted as a 'short run' version of the Heckscher-Ohlin model.
While there are possible gains from trade with absolute advantage, comparative advantage extends the range of possible mutually beneficial exchanges. In other words it is not necessary to have an absolute advantage to gain from trade, only a comparative advantage.
Comparative cost advantage (David Ricardo, 1817)
Main articles: Comparative advantage and Ricardian economics
David Ricardo argued that a country need not have an absolute advantage in the production of any commodity for international trade between it and another country to be mutually beneficialAbsolute advantage meant greater efficiency in production, or the use of less labor factor in production.Two countries could both benefit from trade if each had a relative advantage in production.Relative advantage simply meant that the ratio of the labor embodied in the two commodities differed between two countries, such that each country would have at least one commoditiy where the relative amount of labor embodied would be less than that of the other country.
Gravity model of trade (Walter Isard, 1954)
Main article: Gravity model of trade
The gravity model of trade in international economics, similar to other gravity models in social science, predicts bilateral trade flows based on the economic sizes of (often using GDP measurements) and distance between two units. The basic theoretical model for trade between two countries takes the form of:
with:
: Trade flow
: Country i and j
: Economic mass, for example GDP
: Distance
: Constant
The model has also been used in international relations to evaluate the impact of treaties and alliances on trade, and it has been used to test the effectiveness of trade agreements and organizations such as the North American Free Trade Agreement (NAFTA) and the Worl Trade Organization (WTO).
Heckscher-Ohlin model (Eli Heckscher, 1966 & Bertil Ohlin, 1952)
Main article: Heckscher-Ohlin model
The Heckscher-Ohlin model (H-O model), also known as the factors proportions development, is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries will export products that utilize their abundant and cheap factor(s) of production and import products that utilize the countries' scarce factor(s).
The results of this work has been the formulation of certain named conclusions arising from the assumptions inherent in the model. These are known as:
Heckscher-Ohlin theorem
Rybczynski theorem
Stolper-Samuelson theorem
Factor-Price Equalization theorem
Leontief paradox (Wassily Leontief, 1954)
Main article: Leontief paradox
Leontief's paradox in economics is that the country with the world's highest capital-per worker has a lower capital:labour ratio in exports than in imports.
This econometric find was the result of Professor Wassily W. Leontief's attempt to test the Heckscher-Ohlin theory empirically. In 1954, Leontief found that the U.S. (the most capital-abundant country in the world by any criteria) exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory.
Linder hypothesis (Staffan Burenstam Linder, 1961)
Main article: Linder hypothesis
The Linder hypothesis (demand-structure hypothesis) is a conjectue in economics about international trade patterns. The hypothesis is that the more similar are the demand structures of countries the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowments (relying on specialization to create a comparative advantage in the production of differentiated goods between the two nations).
Location theory
Main article: Location theory
Location theory is concerned with the geographic location of economic activity; it has become an integral part of economic geography, regional science, and spatial economics. Location theory addresses the questions of what economic activities are located where and why. Location theory rests — like microeconomic theory generally — on the assumption that agents act in their own self interest. Thus firms choose locations that maximize their profits and individuals choose locations, that maximize their utility.
Market imperfection theory (Stephen Hymer, 1976 & Charles P. Kindleberger, 1969 & Richard E. Caves, 1971)
Main article: Market failure
In economics, a market failure is a situation wherein the allocation of production or use of good and services by the free market is not efficient. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that can be improved upon from the societal point-of-viewThe first known use of the term by economists was in 1958but the concept has been traced back to the Victorian philosopher Henry Sidgwick.
Market imperfection can be defined as anything that interferes with tradeThis includes two dimensions of imperfectionsFirst, imperfections cause a rational market participant to deviate from holding the market portfolioSecond, imperfections cause a rational market participant to deviate from his preferred risk level.Market imperfections generate costs which interfere with trades that rational individuals make (or would make in the absence of the imperfectionThe idea that MNEs owe their existence to market imperfections was first put forward by Hymer, Kindlebergr and CavesThe market imperfections they had in mind were, however, structural imperfections in markets for final products.According to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentationbut in their absence markets are perfectly efficientBy contrast, the insight of transaction costs theories of the MNEs, simultaneously and independently developed in the 1970s by McManus (1972), Buckley and Casson (1976), Brown (1976) and Hennart (1977, 1982), is that market imperfections are inherent attributes of markets, and MNEs are institutions to bypass these imperfections. Markets experience natural imperfections, i.e. imperfections that are due to the fact that the implicit neoclassical assumptions of perfect knowledge and perfect enforcement are not realized.
New Trade Theory
Main article: New Trade Theory
New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing returns to scale and the network effect. Some economists have asked whether it might be effective for a nation to shelter infant industries until they had grown to a sufficient size large enough to compete internationally.
New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market (via a Network effect).
Specific factors model
Main article: International trade#Specific factors model
In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. Thus, this model can be interpreted as a 'short run' version of the Heckscher-Ohlin model.
No comments:
Post a Comment