Modern International Trade Theory Quiz

Modern Theory of International Trade vs. Classical Trade Theory

• The modern theory of international trade differs from classical trade theory in that it recognizes increasing returns to scale, imperfect competition, and trade in intermediate goods.

What is the Modern Theory of International Trade?

• The modern theory of international trade, also known as New Trade Theory, emerged in the 1980s as a response to the limitations of classical trade theory.
• It incorporates imperfect competition, economies of scale, and transport costs into the analysis of international trade.

Key Concepts in the Modern Theory of International Trade

• Intra-industry trade: trade of similar products between countries, increasing variety and competition.
• Increasing returns to scale: as firms increase production, average costs decrease, making them more competitive.
• ** Imperfect competition**: firms have some degree of market power, affecting prices and trade patterns.
• Economies of scale: large-scale production reduces average costs, making firms more competitive.
• Transport costs: costs associated with moving goods between countries, affecting trade patterns.