UNIT 2 Theories of International Trade.docx

**Theories of International Trade** **Classical Theories** 1. **Adam Smith\'s Theory of Absolute Advantage:** - A country should specialize in producing goods it can produce more efficiently than others. - Trade benefits both countries involved. 2. **David Ricardo\'s Theor...

**Theories of International Trade** **Classical Theories** 1. **Adam Smith\'s Theory of Absolute Advantage:** - A country should specialize in producing goods it can produce more efficiently than others. - Trade benefits both countries involved. 2. **David Ricardo\'s Theory of Comparative Advantage:** - A country should specialize in producing goods it can produce at a lower opportunity cost than others. - Even if a country has an absolute advantage in all goods, it can still benefit from trade. **Neoclassical Theories** 1. **Heckscher-Ohlin Theorem:** - A country exports goods that are intensive in the factors it has in abundance. - A country imports goods that are intensive in the factors it has in scarcity. 2. **Stolper-Samuelson Theorem:** - An increase in the price of a good increases the income of the factor used intensively in its production. - An increase in the price of a good decreases the income of the factor used intensively in the production of other goods. **Modern Theories** 1. **Porter\'s Diamond:** - A country\'s competitive advantage depends on factors related to its economy, education, government, and culture. - These factors interact to create a favorable environment for certain industries. 2. **New Trade Theory:** - Economies of scale and increasing returns to scale are important determinants of international trade. - Countries may trade to exploit these economies of scale. **Key Takeaways:** - International trade can benefit all countries involved. - The theories of international trade provide different perspectives on why countries trade. - The choice of theory depends on the specific context and the factors being analyzed.