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International Trade

International Trade Theory

Before there was theory . . . there was trade! One of
the earliest of humankinds activities.

Trade is the buying and selling of goods and
services across national borders. Why? Because, it is
making both parties to any transaction better off.

Trade theories, in general, attempt to explain who
trades how much of what with whom, and why . . .
and at what price.
But NO ONE THEORY explains all trade!
A Statism or Mercantilism Perspective
From the mid-16
Century. A nations wealth depends on
its accumulated treasure, basically GOLD!

Trade is win or lose; a zero-sum game. Conflict is the

The interest of the State is dominant

Theory says you should have a trade surplus. (X >I)
Maximize exports through Government subsidies.
Minimize imports through tariffs and quotas.

Fit quite well with an age of exploration, colonialism,
imperialism, and capitalism.
Radicalism: Marxist and Dependency Perspectives
Beginning with Marx et. al. in the mid-19
century . . . A reaction to the
industrial revolution

Inevitable conflict between capitalists and workers

Capitalism is inherently expansive, so conflict over resources is
continuous and inevitable. The State will always support the owners of
the means of production.

There is a profound North-South divide; a wealthy Northern
Hemisphere seeking the continued dependency of the Southern

MNCs are modern day imperialists. The IMF, World Bank, WTO and other
international actors protect the interests of the developed world and the
owners of capital.

The Dominant Theory: Economic Liberalism
Adam Smith: The wealth of (a) nation is based on the goods and services
available to its people.

Capability of one country to produce more of a product with the same
amount of inputs than another country.

Produce only goods where you are most efficient, trade for those where
you are not efficient. Specialize.
Trade between countries is, therefore, beneficial and markets will
allocate goods and services.

Assumes there every country has an absolute advantage of some sort

No longer zero sum; everybody wins!
Theory of Comparative Advantage: David Ricardo (1817)
A theory of RELATIVE advantage. Even if a country
produces NOTHING more efficiently than someone else,
both countries can STILL recognize gains from trade.

A nation should give up less-efficient (relatively) output
to produce more efficient (relatively) output without
regard to the ABSOLUTE advantage.

Makes better use of resources; potential world
production is greater with unrestricted free trade than
with restrictions on free trade.

Trade is a positive-sum game. Everybody wins again!
Volume and Patterns of World Trade Today
Trade has consistently grown faster than world output.

U.S., Germany, Japan, France, UK (and China) are among top
merchandise exporters.

Trade between the worlds high-income economies accounts for
roughly 60 percent of total world merchandise trade.

Two-way trade between high-income countries and low- and
middle-income nations accounts for about 34 percent of world
merchandise trade.

Intra-regional trade levels are high (67% in Western Europe, 49 % in
Asia, 40% in N. America)

The Continuum of Trade
All countries fall on a continuum of trade

Trade relationships with a dominant partner can be

Balance between Dependence and Independence