INTERNATIONAL TRADE THEORIES

THEORIES OF TRADE




MERCANTILIST THEORY 

• To export is good, to import is to be avoided. When you exported, you receive payment. Currency based on gold standard; problem with this theory is that excludes the fact that in some cases it is good to import.

ABSOLUTE ADVANTAGE

• Countries should specialize in producing what they are best at things they have an absolute advantage. incentive to trade is based on each country having an absolute advantage in a product this theory seems to make sense in situations, where the circunstances of the geographic and economic enviorement are relativity simple and straight forward.

COMPARATIVE ADVANTAGE

• Countries will trade without having to have an absolute advantage, they only need a comparative, this trade happens when the "relative" cost of doing business is  diferent between two countries, there are benefits to trade even when one trading partner is absolutely better in production.

FACTOR ENDOWMENTS

• A country should export products that use intensively its relatively abundant factors, and import products that use intensively its scarce factors. A country should export products which are made from material.  

THE PRODUCT LIFE CYCLE