What are the six theories of international trade?

Five Theories of International Trade

International trade is the purchase, sale or exchange of goods and services across national

borders (Wild, Wild & Han 2006). International trade produces many benefits to countries both

exporting and importing products. For countries importing products, the benefit is that they get

goods or services they cannot produce enough of on their own. Likewise, for the exporter, one of

the benefits is through the trade they can also get either the goods or services they need or the

money in which to purchase these goods from another country or source. International trade also

helps the economies of the countries by providing more jobs for people in order to process these

various commodities. The economy of countries affects the world output of international trade. If

a country's economy is slow so does the volume of international trade while a higher output

produces more trade. If a currency is weak in one country as compared to the other countries of

the world then the imports are going to be more expensive than domestic products. In relation to

trade walking hand in hand with world output, trade has consistently grown faster than output.

International trade encompasses many aspects in relation to various countries. There are many

theories regarding international trade. Some of these include mercantilism, absolute advantage,

comparative advantage, factor proportions theory, international product life cycle, new trade

theory and national competitive advantage.

1. Mercantilism is a theory

The mercantile theory states that nations should accumulate financial wealth through exports and

discouraging imports. This was accomplished through trade surpluses, government intervention

and colonization. These three things worked together. Trade surplus was maintained through the

colonization of under developed territories for their raw materials. The country would colonize

these under developed countries, ship the raw materials needed for export back to the home

country and export the finished product around the world. The government intervention occurred

when they banned certain imports or imposed a tariff on these imports. At the same time, the

government would subsidize their own industries to expand exports.

2.The absolute advantage theory

The absolute advantage theory is the ability of a nation to produce a product more efficiently

than any other nations using the same amount or fewer resources. The difference in this theory is

that trade should not be banned or restricted by tariffs but allowed to flow freely according to the

demand of the market. This theory also states that the objective be that the people of the country

have a higher living standard by being able to obtain goods more cheaply and in greater

abundance. The theory measures a nation's wealth on the living standards of the people and not

on the money the country has in its reserve.

3.The comparative advantage theory

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