International Trade: Theory and Policy

International Trade

Demand as an explanation of trade in exchange of money was ignored in the Benthamite utilitarianism which took precedence during the first two decades of the 20th century. In the meantime, the supply side inherent in these ideas had radically shifted, from Ricardian to reciprocal market. Many years later, Alfred marshall proposed further the position of the market concerning the "Price Curve," which complemented the Ricardian exchange theory by specifying the "trading words." 

As long as goods exchanged are of a "normal" class, elastic demand and production are not subject to increasing profits, the conditions for trade as above are fixed at a stable balance.

Resource endowment as a basis for free trade doctrines

The balancing act between supply and demand forces with its concept of cost of opportunity defined to the usefulness of forgotten uses. It provided the foundation for the subsequent edition of the Heckscher-Ohlin free trade theory. The usage of the marginal values, as the classical principle was switched over in this approach. 

Around the same time, the protection of free trade as Pareto optimal has been placed for competitive supply costs, thereby ensuring that the two exchanging nations are in harmony with the allocation of output, demand and exchange.

The neo-classical theory of exchange remains a particular appeal to economists who are championing free markets based on global equilibrium, competitive efficiencies, demand and automated use of output factors at maximum potential. Unlike the Rico-style model in which the cost of production calculated in working hours dictated the economic advantages, customer expectations (ordinary rankings) for commodities are as significant as the price competition considerations for trading nations.

Logical problems of the endowment approach and modifications

The HOS model, theoretically, required a reinterpretation to support its main statement concerning the factor price equalization. The credentials in general attributed by Minhas further limited the model to CES production functions. It is subject to constant elasticity in replacement of input factors, excluding the reversal of factor strength and It disrupts the uniqueness of the commodity price-factor boundary to the restrictive factor-speed ordering of products. It was ultimately imperfect specialization concerning exchange in both commodities that assured market equalization as a result of the free trade in goods according to the hypothesis mentioned above. As was the case with the Ricardian model, prices remained actual and not units of currency.

Theory of overlapping demand: the new role of demand in trade theory

In 1964, a Swedish economist, Staffan Linder, presented an alternate definition of trade behaviour in terms of "overlapping demand," which deviated from the supply-side understanding of the nature of exchange in literature. According to Linder, the representative requirement in the exporting nations of the variety of products traditionally required for per capita income decides the viability of foreign exchange. In manufacturing and export, representative demand in each nation will balance the spectrum of products generated and consumed together. Concerning the understanding mentioned above of exchange, demand and not supply is essential to exchange. In terms of competitive risk and factor equity, Linder’s notion of exchange overrides the previous emphasis on supply-based theories of exchange. 

Intra industry trade with product differentiation

As demand for individual varieties created by the same industry in both countries is developed, this process allows space for cross-sectoral (industry) exchange across nations. To increase their profits by gaining from the specific elasticity demand in both countries, for the same benefit.

Strategic trade, reciprocal dumping, and industrial policy in advanced nations

Brander and Spencer formulate the notion of 'strategic trade,' imperfect markets with potential reciprocal dumping by countries on each other's markets. The above concerns circumstances where demand curves are subject to flexibility in both countries. By developing a niche market through subsidized export dumping, the prominent example of the Airbus and Boeing industries has become an active preventive. It is often a related possibility of internal economies of scale as countries which have been traditionally ahead of others to deliver the goods have the edge over other countries that have been willing to compete at cheaper rates than many countries might at the outset. These circumstances support a competitive commercial approach with the grants given in a high-cost state in the same manner as with the Christian "infant sector," to enable it to exploit the economies of scale.

FDI, technology, and trade

Foreign Direct Investment (FDI), an influencing element and trend of trade flows along with development flows, has not been lost sight of in the literature on trade theory. Attention was drawn to the observations of the technology-led external investment and trade flows as a "product-life-cycle" (PLC). When product creation is "matured," technologies and resources will transfer to the other developed countries and deliver similar products that are in effect returned to the leading, advanced country. In the first two phases of development, Lower Developed States import these products from their respective developed exporting countries. The growth in the least developed world is, therefore, starting slowly and the commodity is "standardized," thus finishing the product life cycle. 


It seems like the evolution of trade philosophy has influenced strategy on two occasions, from the old trade theories to the NTT. The first strategy concerns the ongoing promotion of the free trade doctrine to determine development policy. The other influence of economic theory involves developed nations' plans which are focused on international trading NTT doctrines. The asymmetrical mix of strategies, to which trade theory has unfortunately contributed a lot, persists with unequal power relations between the rich and developing nations of the world. Many political leaders' concerns about the micro-theoretical formulations of the theory of trade, both old and newInternational Trade, are linked to a total disregard of national and world economic issues. One hopes only that such constraints can be discussed in new hypotheses that have yet to be established.


963 Words


Aug 07, 2020


2 Pages

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