INTERNATIONAL TRADE THEORIES

Dr. Mahima Mishra 1

 THE MERCENTALISTS
(17th & 18th century)

They in order to have favorable BOT advocated

Government regulations like tariff, quotas etc. to
minimize import and maximize export of
manufactured goods.
This logic is good for single nation but if all the
nations starts using this it cannot be implemented
successfully.

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By the 18th century they were under strong attack.
According to David Hume’s Price Specie Flow
Doctrine favorable BOT is possible only in short
run . In long run by continuous inflow of gold it
will automatically come to normal level of BOT.

Their Static View where mercantilist believed

that worlds wealth was fixed was also challenged.

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 LIBERALISM BY SMITH & RICARDO
(18TH century)
Smith was against both Export subsidies as well as
import restrictions & favored free trade among
nations.
He proposed Principle of Absolute Advantage,
wherein a nation will import those goods in which
it has an Absolute Cost Disadvantage & export
those goods in which it has absolute Cost
Advantage.

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RICARDO’S THEORY OF COMPARATIVE
DIFFERENCES IN COSTS

According to him , its not Absolute Differences in

cost but Comparative Difference in cost that
determine trade relations .

Therefore each country should specialize in

production of that commodity in which it has
greatest comparative advantage & least comparative
disadvantage .
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 WINE CLOTH
ENGLAND 120 100
PORTUGAL 80 90

Domestic Exchange ratio in England is :

100 cloth : 120 wine
1 : .83
Domestic Exchange ratio in Portugal is :
90 cloth : 80 wine
.89 : 1
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Suppose exchange rate b/w England & Portugal
is
1 unit of cloth = 1 unit of wine
England gain = 1 - .83 = .17 unit
Portugal gain = 1 - .89 = .11 unit
Therefore trade is beneficial for both countries.

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INTERNATIONAL PRODUCT LIFE CYCLE
THEORY

Given by Prof. Raymond Vernon to explain

that why a product that begins as a nations
export ends up becoming an import.

PRODUCT STAGES

1. New Product
2. Maturing Product
3. Standardized Product
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Therefore according to this theory , latest
innovative & unique products are first
produced by patent firms then by its foreign
subsidiaries and finally anywhere in world
where cost of production is less. Thus
exporting country often become importing
country.

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NATIONAL COMPETITIVE ADVANTAGE:
PORTER’S DIAMOND

According to him four major attributes that

determine international competitiveness are –

1. FACTOR ENDOWMENT
a) Basic factors – natural resources, nature,
climate, location, demography etc.
b) Advanced factors – communication,
infrastructure, skilled L, technology etc.

2. DEMAND CONDITIONS
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3. RELATED AND SUPPORTING INDUSTRIES

4. FIRM STRATEGY, STRUCTURE AND RIVARLY

Different management policies and practices of different

countries can help or can't help to develop international
competitiveness.

Thus according to Porter above four attributes can

influence international competitiveness & government
policies can either positively or negatively influence all
above four attributes.

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