International trade theory explains the concept of the international trade and distributions of the gains from the trade. The theory highlights the necessity and importance of the trade. International Trade theory highlights the different models of international trade, that have been created to define the diverse ideas of exchange of goods and services across the global boundaries. The theory has been changed frequently , but the major objective of the theory is to gain maximum gain from the profit in the business.
International trade theory is crucial to the continuance to the globalization . It plays an important role in global networking , without international trade theory , world would be limited within its own boundary. International trade theory is not only essential for the economists but also for the people who wants to understand the mechanism of the globalization and relations among nations . It provides the criteria of the international trade patterns , and interactions of the trade and the economic growth.
There are different theories regarding the international trade , David Ricardo is the creator of the classical theory of the international trade . The Ricardian theory holds that a difference in comparative costs of a production is the necessary condition for the existence of international trade. According to this theory Exchange of goods between two countries would be based on this principle of comparative advantage, each exchanging goods that they produce the best . Technological differences between the countries determine international division of labor and consumption and trade patterns .
It says trade is beneficial to the all participating countries. The Ricardian model and the Hecksher Ohlin model are two basic models of trade and production. In the early 1900s an international trade theory called factor proportions theory emerged by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory is also called the Heckscher-Ohlin theory. The Heckscher-Ohlin theory stresses that countries should produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply.
They provid ethe pillars upon which much of pure theory of international trade rests . The heckscher Ohlin model has been one of the dominant model of comparative advantage in modern economics. Ricardo’s idea was even expanded to the case of continuum of goods by Dornbusch, Fischer, and Samuelson . This formulation is employed for example by Matsuyama and others. These theories uses the special property which is applicable only for the two country case. International trade theory has a significant impact on the economic integration.
It determines the country is said to have an absolute advantage in producing a good if a worker in that country can produce more of the good than a worker in the same industry in a different country. International trade is beneficial even when one country has an absolute advantage in producing almost everything because the gains from trade depend on the concept of comparative advantage. Every nation’s unique combination of scarce natural resources, labor and capital determines what goods and services its people can produce most efficiently.
Through trade, countries exchange goods they produce most efficiently for goods other countries produce most efficiently. The total output of the world economy and the standard of living in each country will be higher if workers produce more of those items in which their country has a comparative advantage. http://www. lotsofessays. com/viewpaper/1686687. html International trade theory helps determine the equilibrium of the demand and the suppy in the country .
It measures distance between countries and the size of the economy of the trading countries. It measures the economic growth and insist on necessity and benefits of the trade . The theory has huge impact on economic integration