TABLE OF CONTENTS
International Trade theory
Theory of International Trade
Reasons for International Trade
Advantages and disadvantages of international trade
Division of international trade
Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between two or more countries. We also have two types of theories they are the modern theory and classical theory.
INTERNATIONAL TRADE THEORIES
International Trade:- Also known as foreign or external trade involves the exchange of goods and services between tow or more countries. The underlying the buying and selling between one country and another is specialization.
The Theory of International Trade
Therefore is based on the principle of comparative cost as propounded by David Richardo. The theory state that a country should specialize in the production of goods and services for which it has cost advantage over another country. This he pointed out will bring about the production of goods at cheaper cost.
Types of International Trade
1. Bilateral international trade:- It is a trade agreement in which two countries exchange goods and services. It occurs when
2. each country tries to balance its payment and receipt separately and individually with each other.
3. Multilateral International Trade:- multilateral International Trade is a type of internal trade which a country trades with many other countries. This ensures international division of lobour. It is a type of trade in which many countries exchange their goods and services e.g. Nigeria trades with USA, Britain and Japan etc.
Theories of International Trade
Classical theory of international trade or country based: is classified into four namely;
1. Mercantilism: Developed in the sixteen century, mercantilism was one of the earliest efforts to develop an economy theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. Mercantilism believed that a country should increase its holding of cold and silver by promoting export and discouraging imports.
Although mercantilism is one of the oldest trade theories, it remains part of the modern thinking.
2. Absolute Advantage: In 1776, Adam Smith questions the leading mercantile theory of the time in the wealth of nations, Smith offered a new trade theory called absolute advantage which focused on the absolute of the country to produce a goods more efficiently than another nation, Smith reasoned that trade between countries shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should flow naturally according to market forces.
This theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. It also stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standard of its people.
3. Comparative Advantage: The challenge to the absolute advantage theories was that save countries may be better at producing both goods and therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantage. To answer this challenge, David Ricardo, reasoned that even if country had the absolute advantage in the production of both product, specialization and trade could still occur between two countries. It occurs when a country cannot produce a product more efficiency that the other country. It focused on the relative productivity differences, whereas absolute advantage looks at the absolute productivity.
4. Factor Proportions (Heckscher –Ohlin Theory):- The theory of Smith and Ricardo didn’t help countries determine which product will give a country an advantage. Both theories assumed that free and open market could lead countries and producers to determine which goods they could produce more efficiently. This theory states that countries will produce and export goods that require resources or factors that were in great supply and therefore, cheaper production factors in contrast country will import goods that require resources that were in short supply, but higher in demand.
MODERN INTERNATIONAL TRADE THEORY
In contrast to classical, country based trade theories; the category of modern, firm-based theories emerged after World War II and was developed in large by business school professors, not economists. The firm based theories evolved with the growth of the multinational company. This is classified into five.
1. Country Similarities Theory:
Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain the concept of intraindustry trade Linder’s theory proposes that consumers in countries that are in the same or similar stage of development will have similar preferences. In this firm based theory, Linder suggested that company should produce for consumption. This theory states that most trade in manufactured goods will be between countries with similar per capital income and intraindustry trade will be common. This theory is most useful in understanding trade in goods where brand names and products reputations are important factors in the buyer’s decision making and purchasing process.
2. Product Life Cycle Theory
Raymond Vernon a Harvard business school professor developed the product cycle life theory in 1960s. The theory originated in the field of marketing, stated that a product life cycle has three distinct stages:
1. New product
2. Maturing product
3. Standardized product
The theory assumes that production of the new product will occur in the home country of its innovation in 1960s.
REASONS FOR INTERNATIONAL TRADE
Countries engage in international trade for the following reasons:-
1. Uneven distribution of natural resources while some countries are naturally blessed, others have little or no natural resources.
2. Differences in dimatic conditions – The dimatic condition of the earth various from one region to another. This variation gives rise to growth of different crops, hence the need for exchange.
3. Differences in level of technology.
4. Desire to imprive the standard of living
BARRIERS/PROBLEMS OF INTERNATIONAL TRADE
1. Language problem
2. Differences in currency
4. Problem of distance
5. government policies
Advantages of International Trade
1. International trade is a sources of revenue for nations of the world.
2. It prootes economic development
3. Proviiosn of empmployment opportunities
4. Equitable dsitribiton of national resoruces
5. Increase in standard of living
6. It leads to international specilziation
7. It fosters doser international relationship.
1. Encouragement of dumping of goods.
2. Creation of balance of payment deficit
3. It leads toe exploitation
4. Destruction of cultural values of a country.
5. importation of dangerous or harmful/goods
6. It leads to unemployment
Division of International Trade
International Trade can be divided into three: Import, export and entrepot trades:-
a. Import Trade:- Import trade is defined as the act of buying goods and services from other countries. The goods are imported either in response to direct orders or on consignment. Import trade is of two types.
i. Visible imports:- Consist of goods that can be touched and seen. e.g automobile electronics etc.
ii. Invisible imports:- consist of services rendered by other countries that cannot be seen or touched. E.g banking, tourism and aviation.
b. Export trade:- It may be defined as the act of selling goods and services to other countries. It is divided into:
i. Visible export: consist of goods which are sold in oversea market i.e. to other countries.
ii. Invisible export:- services rendered to other countries e.g banking, transport insurance and other consultancy services.
c. Entrepot: Entrepot is a form of foreign trade in which goods shipped tone port are subsequently re-exported to another port. If customs duty had been paid on imported goods which are later re-exported, the dirty can be claimed back simply put, entrepot is the re-exporting of goods imported from other countries
Increase international trade is crucial to the continuance of globalization. Therefore, without international trade nations would be limited to the goods and services produced within their own borders.
Theories of international trade by:-
· Czinkota, M. R. (1995) the World Trade Organization Perspective and Prospects” Journal of International Marketing (vol3,1)
· Central Bank of Nigeria. The Changing Structure of the Nigeria Economy and Implications for Development Lagos. Reading Publications Ltd, 2000.
· Essentials of Economics by Cole ESAN ANDE
· Learner E. E. (1980) The Leontif Paradox Reconsider ed. Journal of Political Economy 88: 495-503
· Lawrence, C. O. and Ama A. U. (2005) Essentials of Business Management Rhyce Kerex Publishers 56, Motor House/ Denton Street Ogui –Enugu, Nigeria 2nd edition.
· Main Article Timeline of International Trade inkipedia.com.
· Ojo, A. T. and Adewanmi (1980) Cooperative Banking in Nigeria: Evolution Structure and operation: University of Lagos Press.
· Ruffin, R. J. and Gregory P. R. (1983) Principles of Macro economic: Scott, foreman and coy.
· Steve Suranovic George Washington Univ. DL Version I. O.
· Sylvester I. U. (R.2004) Basic Economic Theory and Principles