International Trade Theories

Study Notes

Laissez-Faire approach: allows market forces to determine trading relations, no government intervention.
Interventionist approach: advocates government intervention to achieve a surplus in the balance of trade, e.g., Mercantilism.

Originated in mid-16th century Poland.
Aims to maintain a trade surplus by exporting more than importing.
Views trade as a zero-sum game, where one country's gain results in another's loss.
Advocates government intervention to achieve a surplus in the balance of trade.

Allows countries to specialize in producing and exporting products and services they can manufacture efficiently.
Enables countries to import products and services that can be produced more efficiently in other countries.

Absolute Advantage Theory: suggests countries should produce goods and services in which they have an absolute advantage.
Comparative Advantage Theory: suggests countries should produce goods and services in which they have a comparative advantage.
Factor Proportion Theory: suggests countries will specialize in producing goods and services that utilize their abundant factors of production.
Country Size Theory: suggests larger countries tend to have a comparative advantage in industries that require large-scale production.
Country Similarity Theory: suggests countries with similar factor endowments and technologies will tend to trade more with each other.
Product Life Cycle Theory: suggests countries will trade more with each other as products go through different stages of the product life cycle.

Helps policymakers understand how to achieve economic objectives.
Enables countries to make informed decisions about what products to import and export, how much to trade, and with whom to trade.