Evolution of International Trade Theory

Study Notes

Evolution of International Trade Theory

Early Theories (16th-18th Century)
- Mercantilism: Advocated national wealth through trade surpluses; favored exports over imports to increase gold reserves; promoted protectionism and colonialism.
- Physiocracy: Originated in France; emphasized agriculture as the main productive sector; argued for free trade and minimal government intervention.
Classical Theories (18th-19th Century)
- Adam Smith's Absolute Advantage: Proposed specialization in goods where countries have efficiency; established principles for free trade.
- David Ricardo's Comparative Advantage: Suggested countries specialize in goods with lower opportunity costs; highlighted benefits of specialization and trade, even if less efficient overall.
Modern Theories (20th-21st Century)
- Heckscher-Ohlin Theory: Focused on factor endowments; countries export goods that use abundant production factors and import those that require scarce ones.
- New Trade Theory: Emphasized economies of scale; suggested large-volume production creates competitive advantages in global trade, even among similar factor endowments.
- Gravity Model: Trade influenced by countries' economic size and proximity; larger and closer economies trade more.
- Porter's Diamond: Analyzed national competitive advantage based on factor conditions, demand conditions, related and supporting industries, and firm strategies.
Contemporary Trends
- Globalization and Trade Agreements: Growth of international agreements like the WTO facilitated significant trade increases.
- Technological Advancements: Innovations in transport, communication, and logistics enhanced international trade opportunities.
- Trade in Services: Increased international trade in services such as tourism, finance, and education due to service sector growth.
- Sustainability and Fair Trade: Rising concerns over environmental impact and ethical practices shaped trade policies and consumer preferences.

Barter

Definition: An exchange system where goods or services are traded directly for other goods or services, without money.
Characteristics
- No Money Involved: Transactions occur without currency; goods or services are exchanged based on mutual value.
- Direct Exchange: Transactions happen between two parties directly, without intermediaries.
- Mutual Agreement: Value of exchanged items must be agreed upon by both parties.
Examples of Barter
- Trading surplus vegetables for eggs between farmers.
- A web designer exchanging services for plumbing work.
- A carpenter trading furniture for painting labor.
Advantages of Barter
- Eliminates the need for currency, benefiting in cash-scarce situations.
- Enables efficient trade of goods and services without monetary hindrances.
- Builds relationships and community through direct exchanges.
Disadvantages of Barter
- Challenges in determining fair value for goods/services may arise.
- Lack of standardization can lead to disagreements over value.
- Limited practicality for larger transactions or complex exchanges.
Early Forms of Barter: Direct exchange practices among prehistoric communities involved simple trade of goods before the introduction of currency.

Description

Explore the evolution of international trade theory from its roots in mercantilism to contemporary perspectives. This quiz delves into the significant milestones and changing economic realities that have shaped theories over the centuries. Test your knowledge on key concepts and historical contexts.