A critique of modern theories of trade (original) (raw)
International Trade with Classical and Contemporary Theories
Over its two hundred-year history, international trade theory witnessed increasing role of knowledge. Following classical theories of Smith (1776), and Ricardo (1817), based solely on labor as an element of cost, neoclassical contributions made it possible to take capital and other production factors into account through the concept of opportunity cost, undermining knowledge. Even the modern trade theories of Heckscher-Ohlin-Samuelson used two-factor models including just labor and capital. As of 1960s, parallel to the debate over Leontief Paradox, new theories of international trade began to cover knowledge and related concepts like skilled labor, technology gap, product cycle, etc. According to theories, how and who can trade with whom, we will try to explain this situation in this study.
Revisiting The International Trade Theories
isara solutions, 2021
This paper provides a comprehensive examination of diverse trade theories that have shaped international trade. The analysis spans traditional theories such as mercantilism, absolute advantage, and comparative advantage, highlighting their significant principles and criticism. Moving beyond classical paradigms, the paper delves into neoclassical theories, emphasizing the role of factor endowments, factor proportions, and the Heckscher-Ohlin model in explaining patterns of trade. The paper further explores modern trade theories, including the New Trade Theory and the Strategic Trade Policy. These perspectives elucidate the role of economies of scale, imperfect competition, and government intervention in shaping trade dynamics. Additionally, the paper discusses the rising relevance of global value chains and their impact on international trade patterns. Incorporating recent developments in economic thought, the analysis extends to theories addressing non-traditional aspects of trade, such as the New Economic Geography and the Gravity Model. These frameworks offer insights into the spatial distribution of economic activities and the gravitational forces influencing trade flows between nations.
Implications for the Development of Trade Theory
2001
The development of capitalism has reached a new historical phase, in which world trade is dictated by foreign direct investment (FDI). In the 19th century, transactions be-tween countries were mainly conducted in goods, to which portfolio investment was added in the century’s closing years. FDI gained importance in the 20th century, par-ticularly after the 1960s, due to worldwide operational expansion by multinational cor-porations. While trade in goods maintains its importance, it is now under constraints presented by FDI. This shift in the structure of interna-tional transactions is reflected in the litera-
A Survey of the Evolution of International Trade Theories
2020
The purpose of the paper is to give emphasis to the evolution of international trade theories and their application among nations. A review of the literature method was applied to review the evolution of different scholars’ contributions in the area of international trade. Over a period of time, the development in theories of international trade has gone significant changes. While classical and neo-classical trade theories remain valid new trade models have important insights to describe and seem to a better explanation of the present global trade patterns in the dynamic world.
Advanced international trade: theory and evidence
Journal of International Economics, 2005
Given how relentlessly empirical trade has become, it has long been a puzzle to me that, until now, there was no text book at the graduate level which taught trade as an empirical area. Feenstra's offering provides the much-needed blend of theory, and empirical work inspired by the theory, required for a deep appreciation of trade. The material is covered at a graduate level, but without being unnecessarily nerdy. The exposition is very fine indeed, making the book surprisingly easy to read for a textbook. It is up-to-date and one hopes that there will be future editions to ensure that it remains this way. This book is a must have for anyone with any interest in International Trade.
Towards the Importance of Theories of Trade as Part of Trade Science
Studia commercialia Bratislavensia, 2012
Theory of trade is a name dealing with trade as a scientific discipline, which is made up of a set of generalised knowledge of trade, of laws determining its essence and operation. This scientific discipline also includes the knowledge of the origin of the relations, operation of these relations, and their means and tools in trade. Theory of trade is a summary of numerous interrelated and partial theories of trade, which are based on the pillars of general economic theory and general trade theory. The aim of the paper is to highlight the importance of some of these theories with focus on their historical retrospective as well as to evaluate to what extent each of these theories is justified.
International Trade Theory and Policy: A Review of the Literature
SSRN Electronic Journal, 2000
This paper provides a survey of the literature on trade theory, from the classical example of comparative advantage to the New Trade theories currently used by many advanced countries to direct industrial policy and trade. An account is provided of the neo-classical brand of reciprocal demand and resource endowment theories, along with their usual empirical verifications and logical critiques. A useful supplement is provided in terms of Staffan Linder's theory of "overlapping demand," which provides an explanation of trade structure in terms of aggregate demand. Attention is drawn to new developments in trade theory, with strategic trade providing inputs to industrial policy. Issues relating to trade, growth, and development are dealt with separately, supplemented by an account of the neo-Marxist versions of trade and underdevelopment.
LITERATURE REVIEW ON THEORIES OF INTERNATIONAL TRADE AND POLICIES BEHIND MODERN WORLD TRADE
Journal of Indonesian Applied Economics, 2023
The essay aims to critically examine different theories proposed in the literature on international trade. Design/methodology/approach The essay is based on theoretical literature on the theories of international trade and working policies behind modern world trade globally Findings The essay discusses traditional international trade theories, mercantilist patterns, simplified models, new trade theories, strategic trade policies by advanced countries, FDI and technology role, and trade's impact on growth. It also discusses 21st-century theories, advocating for models that incorporate income inequality, political strategies, and real-world factors, and calls for models that incorporate income inequality and other real-world factors. Research limitations/implications The essay deals with only theoretical literature on international trade theories and policies. Findings and interpretation are subject to the theoretical development of international trade Originality/value The essay provided a critical explanation of international trade theories and tried to explain the paradigm shift in the theoretical framework of international trade.
Changing Paradigm in Trade Theories: A Review and Future Research Agenda
Indian Journal of Science and Technology, 2016
Objectives: The objectives of the study were to understand the evolution of trade theories and their application across nations over a period of time and to provide future direction of research for international trade. Methods/Statistical Analysis: To meet the objectives, the study undertook a comprehensive review of literature to bring together works of different researchers in the area of international trade. It summarizes the past theories and applications with the research advancements over the years. Findings: The study finds that over the years, research in international trade has evolved with new forms of models coming into existence. Many trade theories like absolute advantage, comparative advantage, factor endowment, factor price equalization, gravity model etc. have emerged and applied. At the same time, the trade environment across the developed and developing countries has metamorphosed with the advent of World Trade Organization and multiple trade blocs. Several factors have significantly gained importance, thus leading to a need of new dimensions in trade research. Conclusion/Improvements: The study proposes development of trade models which could incorporate pace of technological development and innovation, economic shocks like financial crisis, Brexit etc. and changes in global value chains. It also highlights the importance of future research in trade in services.
First version October 1 999 ) Trade Theory and Trade Facts
2001
This paper quantitatively tests the “new trade theory” based on product differentiation, increasing returns, and imperfect competition. We employ a standard model, which allows both changes in the distribution of income among industrialized countries, emphasized by Helpman and Krugman (1985), and nonhomothetic preferences, emphasized by Markusen (1986), to effect trade directions and volumes. In addition, we generalize the model to allow changes in relative prices to have large effects. We test the model by calibrating it to 1990 data and then “backcasting” to 1961 to see what changes in crucial variables between 1961 and 1990 are predicted by the theory. The results show that, although the model is capable of explaining much of the increased concentration of trade among industrialized countries, it is not capable of explaining the enormous increase in the ratio of trade to income. Our analysis suggests that it is policy changes, rather than the elements emphasized in the new trade ...
A FORMAL NOTE ON NEW THEORIES OF INTERNATIONAL TRADE AND DEVELOPMENT
Drawing upon the long-run solutions to a number of models in which there are economies of scale and differing degrees of intra-sectoral competition, conditions are found under which an industry's development will spread to further countries and under which the domestic industry should be supported by state intervention. 0 1996 by
International trade theory provides explanations for the pattern of international trade and the distribution of the gains from trade. The theory convinces most economists of the benefits of liberal trade. But many noneconomists oppose liberal trade. Opponents include some who may have encountered trade theory but nevertheless fall prey to fallacious reasoning. This essay attempts to convey why trade theory is so persuasive to economists and also to deal with why many non-economists are not persuaded.
A Neo-Heckscher-Ohlin Model of Trade with Endogenous Production Patterns*
Economic Record, 2005
We propose a Neo-Heckscher-Ohlin (HO) model of trade that combines comparative endowment advantage, comparative technological advantage, international capital mobility and trade costs. Using an inframarginal approach, we produce a partition of the exogenous parameter space in a host of parameter value subsets that demarcate the various equilibrium patterns of production and trade. The results are startling! They suggest that production within the diversification cone -a key assumption of the Heckscher-Ohlin theory that is required for its core propositions (such as factor price equalisation) to hold -may only prevail on the razor's edge, or under exceptional circumstances. In addition, our findings nominate a mechanism by which improvements in transaction efficiency facilitate international trade thereby stimulating cross-country division of labour. Contrary to other generalisations of the Heckscher-Ohlin (such as the various derivatives of the Kemp-Jones model of trade), our model does not assume a purely Ricardian character: comparative endowment advantage may determine the pattern of trade even in the presence of opposing technological differences, as long as total factor productivity coefficients adjusted for transaction efficiency and factor intensity do not confer unambiguous comparative (technological) advantage. Still, 'intensity-efficiency'-adjusted comparative technological advantage supersedes factor endowments in determining the flow of trade. * We, Tombazos and Zhang, would like to dedicate this paper to our dear friend and colleague Xiaokai Yang who died in mid-2004. It is with a heavy heart that we acknowledge this contribution as one of our last co-authored papers with Xiaokai. This research has benefited considerably from discussions with Alan Deardorff, Peter Neary and Hugo Sonnenschein whom we also thank, together with Ron Jones, Murray Kemp, Ed Ray, Don Wright and an anonymous referee for very constructive suggestions on earlier drafts of this
The Impact of International Trade on Economic Growth*
2016
In this paper, we examine the studies, since Adam Smith, on the impact of commercial and technological aspects, resulting from international trade, on the physical accumulation and quality of productive factors. We remark that the theory of economic growth and the theory of international trade, during the ‘classic period’, constituted two inseparable branches of economics. In this epoch, it was believed that international trade has a positive effect on the economic growth. Later, during the ‘neoclassic period’, these two theories of the economic thought became autonomus relatively to each other. Consequently, the importance of international trade was neglected in the context of economic growth, espe ially until the 1960’s. Recently, with the introduction of models of endogenous growth, both theories have merged again. The modelling frameworks advanced by the new models, as well as the recent developments inside the international trade theory, has allowed us to obtain a better unders...
The Pure Theory of International Trade
Econometrica, 1965
The English classical model of foreign trade is the source of many propositions which form the body of international trade theory today. Despite attacks on other branches of classical theory it still survives as a basic tool of analysis. Its survival can be attributed to its applicability to leading policy issues in the country in which it originated, and to the power of its methodology: it was logically immune to the criticisms of general equilibrium and macroeconomic analysis. The classical economists were content to establish the direction in which the terms of trade move as a result of such disturbances as dishoarding, tariff adjustments, devaluation, income transfers and productivity changes. Nowadays more refined methods make it possible to derive more implications from the model, implicit in their analysis, and to ascertain the quantitative extent of the change in the terms of trade. The purpose of this paper is to derive and summarize these results. Specifically, I shall construct an international trade model owing its origin to the classical school, and apply it to determine the exact effects on international equilibrium of unilateral transfers, productivity changes, export and import taxes, and production and consumption taxes. Many of the conclusions are already known, but it is believed that the methods employed will help to simplify the techniques used in this branch of international trade theory, and that the results established will provide a convenient survey of the subject. The first part of the analysis will be concerned with the implications of the two-country two-commodity model usually employed by the classical economists. In the final section an attempt is made to determine the validity of the results when there are many countries.
Journal of education and social studies, 2023
This paper assesses the rumination of classical trade theories in the endogenous growth framework. There are two key verdicts: first, between the endogenous growth models that place emphasis on the development of human capital along with the productivity doctrine of Smith (1776). These similitude frameworks stress the importance of improving global trade on the verge of economic growth. Building up one's human capital. Second, models of endogenous growth place a strong emphasis on the relationship between endogenous technological advancement and the Comparative advantage theory of Heckscher . These similitude frameworks argue that the allocation effect can be used to explain how international trade contributes to the process of economic growth.
A History of Empirical Literature on the Relationship Between Trade and Growth
Mondes en développement, 2006
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A hybrid production structure in trade: theory and implications
International Review of Economics, 2009
In models of pure theory of international trade, no unique production structure is dominant. By grafting a specific factor structure onto a Heckscher-Ohlin framework, in a hybrid general equilibrium production model, this paper presents theoretical results with implications such as: (a) the relative price increase of a traded goods sector might have expansionary or contractionary output effect depending on factor intensities; (b) uniform primary-factor augmenting technical progress in the intermediate inputs sector might lead to a decline in the output of one of the sectors; (c) favorable relative price effect in one sector will lead to a drop in the return to the specific capital type depending on the grafted production structure. The proposed framework is useful for explaining stylized facts related to wage inequality, deindustrialization and export-processing, which have a great policy relevance for trade and development.