Shieryl Mae M.

Vigo International Business

Seven Trade Theories

1. MERCANTILISM – As what I’ve conclude, this theory describe that the wealth of a
country can be enrich when we increase exports and decrease imports by way of selling
more products to other countries yearly than we consume of theirs in value. By its idea
that a nation’s wealth and success is based on the amount of gold’s and silvers it had
which are the currency of trade. It implies the importance of having a trade surplus which
will maximized export through subsidies and minimize imports using tariffs and quotas.

2. ABSOLUTE ADVANTAGES – Based on what I’ve learned, absolute advantages as

described by Adam Smith speaks about the country’s capability in producing a product
having the same amount, in which this country is capable of being most efficient than any
other country in producing a product. They should only produce goods for which they are
capable of producing and trade it for those countries which are not capable of producing
this particular product. It emphasizes the advantageous of trading system. I think that it is
different from the idea of mercantilism since in this theory both countries had gains to an
exchange, and depends on the wealth by the standardized living of its people.

3. COMPARATIVE ADVANTAGES – In part of the David Ricardo’s idea that

comparative advantages stretched free trade argument and emphasizes the importance of
being efficient, having an efficient resources/products results from a greater productivity
and makes it better use of resources. As based on the law of comparative advantages
where it refers to the capability of a country to produce a particular goods or services at a
lower opportunity cost than others. This principle speaks about the specialization of
production and exporting those products in which it has an advantages compared with
other countries and should import those goods which possesses also a comparative
advantages.

4. FACTOR PROPORTION THEORY – I think this emphasizes the element of import and
export. This theory explains that most countries are not of the same kind with respect to
the availability of the factors of production that’s why this theory holds that countries
which produce and exports goods that are abundant in the country and import it to those
country that require this king resources which they are in short supply. A country
specializes in the production of goods that it is particularly suited to produce it. They
focused on how a country could gain comparative advantages over the products they
produced in which it is abundance in the country. In contrast, countries would import
goods that required resources that were in short supply, but higher demand.
5. INTERNATIOAL PRODUCT LIFE-CYCLE THEORY – Based on my own
understanding, all are changing as the time passed by as well as the trade patterns and
that has an emphasis on technology’s impact on the production. This cycle passes through
some stages, first is the new products which you will introduce the products to the local
or national and export it to the countries which has the same needs, preferences and
income. Afterwards get in the stages of growth where demands increases and in sale of
new products which continuously attracts competitors and at this point, the
manufacturing may be undertaken by foreign countries and the third stages will be the
maturity, as the product will mature, both the area where it is originated and the optimal
production will changed. Lastly the decline stage where the original inventor becomes the
importer.

6. NEW TRADE THEORY – As based on what I’ve learned, it focuses on the ability to
enhance the economies of scale, as by the definition of the economies of scale it is the
reduction of unit cost associated with large scale of output. This theory will face many
competitions from the industry that may give a big challenged. Furthermore, in attaining
this economy of scale before somebody else get is an important first-mover advantage
which is important in this theory.

7. NATIONAL COMPETITIVE ADVANTAGE – This theory analysis the reason why

other nations are more competitive in a particular industry. As based on the porter’s
theory, a nations competitiveness of an industry. Every success is determinable when
there are attributes that had been existed, and similar to the new trade theory there are
attributes that has been given in order to success that is called the porter’s diamond. The
greater the attribute, the higher chance of success.