Traditional Trade Theories

Mercantilism before 1776 [Publish of Adam Smith’s Wealth of Nation]

Mercantilists were the group of people including merchants, bankers, govt. officials, philosophers.

As per them, a country can remain rich if its X>M (BOT surplus) →X surplus →inflow of gold and silver →Better Defence and Power →so more power or more gold at the cost of another country.

Crux of Mercantilists

They believed that national interests are definitely conflicting (as one nation can increase its trade only at the cost of another nation)

So govt. imposed price and wage controls, foster national industries, promote exports of finished goods and imports of raw material, and at the same time limit exports of raw materials and imports of the finished good. The surplus exports are in gold →Power

Types of International Trade & Its Importance

• Export Trade: Sale of goods and services to a foreign country

• Import Trade: Purchase of goods and services from a foreign country. Because the importing countries can’t produce these goods and services domestically, because of cost disadvantage or because of physical difficulties, or because of production at a lower scale.

• Entrepot Trade: Combination of Export and Import Trade (Also termed as Re-Export). Importing goods from one country and exporting processed goods to other countries. Such as India imports gold from China and exports jewelry to others.

Role of International Trade & Its Importance

• Makes use of plentiful raw materials

• Economies of Scale

• Competition

• Transfer of technology

• Jon Creation and National Income

Disadvantage:

• Overdependence

• Unfair to new companies

• Threat to National Security

• Pressures on nation’s natural resources

Chronological Order of Traditional Trade Theories

• Absolute Advantage Theory [1776] (Adam Smith)

• Relative/Comparative Advantage Theory [1817] (David Ricardo)

• Heckscher Ohlin Samuelson Model [1919, 1933, 1949] (Eli Heckscher and Bertil Ohlin)

✓ Heckscher Ohlin Theory/ Factor Endowment Theory [1919, 1933]

✓ Stolper-Samuelson Theorem [1941]

✓ Factor Price Equalization Theory [1948]

✓ Rybczynski Theorem [1955]

• Leontief Paradox- Factor Intensity Reversal [1953]