For the success of business, it is important to understand all the key types of international trade theories. The concept of international trading is not limited to, just sending and receiving products and services and putting all of the profits in the pockets. Instead, it’s a lot more complicated thing. In fact, its current shape is the result of many different types of international trade theories that helped it in its evolution through various eras. Honestly saying, apart from making your syllabus boring, these theories can be of great assist in the long run since most parts of these ideas still, hold right. So in this article, we will go through each and every theory and will provide you with a somewhat in-depth detail of these.
7 Types of International Trade Theories
- Absolute Advantage
- Comparative Advantage
- Heckscher-Ohlin Theory
- Product Life Cycle Theory
- Global Strategic Rivalry Theory
- National Competitive Advantage Theory
Above are the 7 different types of international trade theories, which are presented by the various authors in between 1630 and 1990.
The oldest of all international trade theories, Mercantilism, dates back to 1630. At that time, Thomas Mun stated that the economic strength of any country depends on the amounts of silver and gold holdings. Greater are the holdings, more economically independent a country is.
Furthermore, the idea of favoring greater exports and promoting efforts to minimize imports also belongs to the same theory. Well! The thinking behind this concept is evident since you pay for the imports from the pay that you get from exports. So, if you a country has a lot to pay for the imported products then it will get from exported products, its economy will get inclined towards declination. Even though the view is old but the roots of modern thinking towards the financials is deeply embedded in it.
The Theory of Absolute Advantage is based on the notion of increasing the efficiencies in the production processes. In 1776, Adam Smith, a renowned financial expert of the time being, proposed the theory that the manufacturing a product with high efficiency as compared to any other country on the globe is highly advantageous.
The concept can just be understood by the idea that if two countries specialize in exactly same kind of product. But the product of one country being better in quality or lower in price will bring tremendous absolute advantage to the country as compared to the other one. From another point of view, if two countries specialize in entirely different products, then they can quickly increase their influence in their localities by having trade with each other (by creating absolute advantages at both ends).
As compared to absolute advantage, Comparative Advantage favors relative productivity. According to this concept, as put forward by David Ricardo in 1817, a country with maximum absolute advantage in the creation of more than one product as compared to other, can still trade with another country with less efficient ways to create that product, that’s readily available in first, to boost its productivity.
To illustrate this idea with an example, let’s say that I have expertise in two fields like graphics designing and writing, where designing lets me earn a lot more than writing. Keeping in mind that I can work on only one side at a time, I will most likely hire a writer, and we both will work in a comparative atmosphere.
Both the Absolute as well as Comparative international trade theories assume that the choice of the product that can prove itself to be of great advantage is led by free and open markets instead of using the resources available inland. That’s what caused Bertil Ohlin and Eli Heckscher to put forward the idea of determination of the prices that relies on the differences in supply and demands.
This can just be understood as, if the supply of a product grows greater than it is in demand in the market, its price falls and vice versa. So, export of a country should mainly consist of the product that is abundantly available in it, and imports should count the products that are in high demand. Since, this concept ensures utilization the country’s factors like labor, land and funding sources for the purpose of product manufacturing that’s why it is also known by the name of “factor proportion theory.”
Product Life Cycle Theory
In the 1970s, Raymond Vernon introduced the notion of using a product’s life cycle to explain global trade patterns, in the field of marketing. According to theory, as the demand for a newly created product grows, the home country starts exporting it to other nations. Where when the demand grows, local manufacturing plants are opened to meet the request. And the scenario covers the whole globe time to time, thus making that product a standardization.
You can take the example of computers in consideration to understand how this works. The earlier personal computers appeared in 1970’s available only in a few countries and from 1980’s to 1990’s, the product was moving through the stage of maturity where the production spread to many other nations. And now in 21st century, every third house has a PC in it.
Global Strategic Rivalry Theory
The continuous evolutionary behavior of international trade theories brings us back in the 1980’s where Kalvin Lancaster and Paul Krugman introduced the concept of strategies, based on global level rivalries, targeting multinational corporations and the struggle needed in achieving higher advantages as compared to other international companies.
According to the concept, a new firm needs to optimize a few factors that will lead the brand in overcoming all the barriers to success and gaining an influential recognition in that global market. In all these factors, a thorough research and timed developmental steps are crucial. Whereas, having the complete ownership rights of intellectual properties is also necessary. Furthermore, the introduction of unique and useful methods for manufacturing as well as controlling the access to raw material will also come handy in the way.
National Competitive Advantage Theory
Michael Porter in 1990’s suggested that the success of any business in international trade depends on upgradable and innovational capacities of the industry as well as four other factors, which determine how that firm is going to perform in this global level race. The main concept behind this theory gives the feel of holding factor proportion as well as many other international trade theories in it.
One of those factors is the availability of resources in the local market and their prices which are necessary for providing a sustainable and stable environment for the trade to grow. Moreover, the ability of the firm to face competitors and its capacity to upgrade itself also determines the success rate of that brand. Furthermore, keeping the track of the change in demand and the behavior of local suppliers is also important.