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Two Neoclassical Trade Theories

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1. 2. INTERNATIONAL TRADE THEORIES 2.1. Absolute Advantage According to Adam Smith 1776) in….., a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. If two countries specialize in production of different products (in which each has an absolute advantage) and trade with each other, both countries will have more of both products available to them for consumption. 2.2. Neoclassical Trade theory This is also known as Comparative Advantage. (David Ricardo1817) stated that even if one country has an absolute advantage in producing two products over another country, trading with that other country will still yield more output for both countries than if the more efficient …show more content…

Heckscher-Ohlin Theory Comparative advantage ascends from differences in national factor endowments, such as land, labour, or capital, as opposite to Ricardo’s theory which stresses productivity. This theory suggest that the country should focus on exporting products using its scarce resources and brings across a free trade principle where goods will be moving freely without any trade barriers implying that this would make flow of resources in and out more demand and more supply will increase the country’s economy(Eli Heckscher 1919 &Bertil …show more content…

Based on four attributes, first one is Factor endowments that focus on basic factors natural resources, climate, location, demographics second one is advanced factors such as communication infrastructure, sophisticated and skilled labour, research facilities, and technological know-how. Third one will be advanced factors are a product of investment by individuals, companies, and governments. Porter argues that advanced factors are the most significant for competitive advantage. Lastly demand conditions that look at customer need or the demand on which is being produced, companies will have to produce innovative, high quality products early, which lead to competitive advantage. Relating and supporting industries, if suppliers or related industries exist in the home countries that are themselves internationally competitive, this can result in competitive advantage in the new industry, firm strategy, structure, and rivalry. Different nations are characterized by different management ideologies, which can either help or hurt them in building competitive advantage. If there is a strong domestic rivalry, it helps to create improved efficiency, making those firms better international competitors. Porter also notes that chance (such as new breakthrough innovations) and government policies (such as regulation, investments in education, etc.) can influence

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By specializing we are able to produce more than someone who doesn’t. If every country specialized in what they had comparative advantage in, prices of goods would be a lot lower. An example of this is how Florida has an excellent environment to produce oranges cheaply and then transport them to Canada to be sold at a reasonable price. If Canada decided to stop the flow of oranges from Florida and grow them here, production costs would be very expensive. This would result in a price increase of oranges so consumers would end up purchasing less (59).

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