Theories of international trade went through a certain development process. The main questions they tried to answer were “what is the reason for the division of labor between states” and “by what principle is the most effective international specialization chosen”.
Classical Theories of International Trade
Theory of Comparative Advantage
The first theories were laid by the founders of classical economic theory, Smith and Ricardo in the XVIII - early XIX century.
So, Smith laid the foundation of the theory according to which, the reason for the development of international trade is the benefit that importers and exporters can get from the exchange of their goods. He developed the theory of “absolute advantage”: a country has this advantage if it has a product that, relying on its own resources, can produce one more than the other. Such benefits can be natural (climate, soil fertility, natural resources) and acquired (technology, equipment, etc.).
The benefit that the country will receive from international trade will consist in an increase in consumption, which will occur due to a change in its structure and specialization.
Riccardo's theory of comparative costs, developed and supplemented by Haberler
It considers 2 countries producing 2 types of goods. For each country, a production capability curve is constructed that clearly shows which type of product is more profitable for each country. This theory is simplified, it shows only 2 countries and 2 goods, it is based on the conditions of unlimited trade and labor mobility within the country, as well as on the availability of fixed production costs, the absence of transport costs and technical changes. That is why the theory is considered quite visual, but not too suitable to reflect the real conditions of the economy.
Heckscher-Olin Theory
This theory, created in the twentieth century, was designed to reflect the characteristics of trade, based mainly on the exchange of industrial goods (because of this, the dependence of countries' trade on their natural resources has significantly decreased). According to their theory of international trade, the differences in costs incurred by countries in the manufacture of products are explained by the fact that:
- in the production of different products, factors are used in different ratios;
- countries are very differently provided with the necessary factors of production;
This implies the law of proportionality of factors, which reads as follows: in free trade, each state wants to specialize in the production of the goods that require the presence of those production factors with which it is well endowed. International trade, in fact, is an exchange of those factors that are in excess to more rare for this country.
The Leontief Paradox
At the end of the 40s of the XX century, the economist Leontiev, when empirically checking the conclusions of the previous theory based on the data of the American economy, came to an unexpected paradoxical result: mainly labor-intensive products were exported to the United States, while capital-intensive ones were imported. This was contrary to Heckscher-Olin's theory of international trade, since in the US capital, on the contrary, was considered a much more abundant factor than labor costs. Leont'ev suggested that in any combination with a given amount of capital resources, 1 person-year of work of an American is 3 person-years of work of foreign citizens, which was associated with a higher qualification level of American workers. According to statistics compiled by him, the United States exported goods whose production required a more skilled workforce than imported ones. Based on this study, in 1956 a model was created that took into account 3 factors: skilled labor, low-skilled labor and capital.
Modern Theories of International Trade
These theories are trying to explain the features of international trade in the modern world, which no longer obey the logic of the classical theory of international trade. This is due to the fact that scientific and technological progress is taking an increasingly important place in the economy, and the volume of counter deliveries of goods of similar quality is increasing.
Product Life Cycle Theory
The life stage of a product is the period during which it has value in the market and is in demand. The stages of a product’s life are the introduction of the product, its growth, maturity (peak sales) and decline. When a product ceases to satisfy the needs of its market, it begins to be exported to less developed countries.
Scale economics
The main essence of this effect is that with a special technology and level of organization of production, the average long-term costs will decrease as the volume of output of the goods increases, making savings. It is profitable to sell excessively produced goods to other countries.