TABLE OF CONTENTS
Introduction
International Trade theory
Theory of International Trade
Reasons for International
Trade
Advantages and disadvantages
of international trade
Division of international
trade
Conclusion
References
INTRODUCTION
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
3.
Tariff
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.
Disadvantages
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
CONCLUSION
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.
REFERENCES
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