Current Theory of International Trade And Its Benefits

International trade is one of the vital parts of the economy. The increasing globalization along with the world market that starts opening up makes international trade grows exponentially. Companies need to learn about the current theory of international trade and gain benefits from international trade.

International trade is needed because countries are not completely self-sufficient. Those countries depend on others for some services and goods. But trade isn’t a novel concept. The barter system was the first concept of trade. What about today’s concept and theory?

The Classic and Current Theory of International Trade

There were some different classical international trade theories. But the latest one is the modern theory. Before learning about modern theory, make sure that you learn about classical theory first. Below are some different classical theories you may want to know.

1. Mercantilism

This is the very first classical international trade theory. Mercantilism states that every country should prioritize its welfare before thinking about other countries. That’s why a country should always try its best to decrease the rates and increase exports.

This theory is based on the idea that a country’s wealth is depending on the treasures held by the country. That’s why, through exports, the wealth of the country can increase. Another term for mercantilism is the protectionist theory.

2. Absolute Advantage Theory

This theory states that the prosperity and economic growth of the country is depending on the division and specialization of labor that is adopted by the country. This theory was propounded in the book “Wealth of Nations” by Adam Smith.

The government should never interfere or even try to regulate the international trade. They should not try to impose international trade restrictions. Free trade is something legal and government interference is going to be a barrier to international trade and will be harmful for free trade.

3. Comparative Advantage Theory

Before the current theory of international trade, there was also the comparative advantage theory. David Ricardo propounded this theory in the 19th century. According to this theory, a country should export goods that are beneficial and have a relative cost advantage.

Even though the country has enough resources to produce some products, the country can still import from some other countries. However, the country should feel that there will be a relative advantage in importing the product.

4. Modern Theory

Finally, the current theory is the modern theory but is also known as the Heckscher-Ohlin Theory. Another term for this modern theory is the factor endowment theory. This theory was developed by Bertil Ohlin and his teacher Eli Hecksher. Both of them are Swedish economists.

The modern theory says that the exports of a country depend on the country’s resource endowments. A country can have a labor-intensive economy or a capital-abundant economy. If the country has a capital-abundant economy, it can produce and also export capital goods more easily.

But if the country has a labor-intensive economy, then the country is going to produce and also export labor-intensive goods.

Benefits of the Current Theory of International Trade

The modern theory of trade between nations comes with some different benefits. Below are only some of the modern theory benefits.

1. You can observe the trade patterns

Before the modern theory, there was the comparative advantage theory which said that opportunity costs are the base of trade based on the technological differences between two different countries. But the modern theory assumes technology to be identical.

It means the trade of every country will depend on some factors the country is endowed with. This is going to help you understand the patterns of trade in a much better manner.

2. Offers a more realistic approach

Since the theory modern is based on the country’s endowment factor, this theory becomes a more accurate and realistic way to compare the trade imbalance between different countries.

3. Offers insight into economic growth’s impact

The modern theory determines economic growth and also the production efficiency because of the factor endowments’ increase. This is going to help provide insight into the country’s economic growth’s impact.

The modern theory is the current theory of international trade that is much better than the previous one. Knowing the latest theory isn’t enough. You also need to do your best in gathering more customers by using the Hitech Terminal Enterprise from SMS Broadcaster.