Ricardian model

N National Competitive Advantage

N New Trade Theory

N International Product Cycle

N Factor proportion Trade

N Comparative Advantage

N Absolute Advantage

N Mercantilism

Evolution of Trade Theories

Models

History

The history of international trade chronicles notable events that have affected the trade between various countries.

In the era before the rise of the nation state, the term 'international' trade cannot be literally applied, but simply means trade over long distances; the sort of movement in goods which would represent international trade in the modern world.

There have been several models for international trade.

Adam Smith's model

Adam Smith displays trade taking place on the basis of countries exercising absolute cost advantage over one another

The Ricardian model focuses on comparative advantage, which arises due to differences in technology or natural resources. The Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

The Ricardian model makes the following assumptions:

1. Labor is the only primary input to production

2. The relative ratios of labor at which the production of one good can be traded off for another differ between countries

Heckscher-Ohlin model

In the early 1900s a theory of international trade was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory has subsequently been known as the Heckscher-Ohlin model (H-O model). The results of the H-O model are that countries will produce and export goods that require resources (factors) which are relatively abundant and import goods that require resources which are in relative short supply.

In the Heckscher-Ohlin model the pattern of international trade is determined by differences in factor endowments. It predicts that countries willexport

those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, such as the Leontief paradox, were noted in empirical tests by Wassily Leontief who found that the United States tended to export labor-intensive goods despite having an abundance of capital.

The H-O model makes the following core assumptions:

1. Labor and capital flow freely between sectors

2. The amount of labor and capital in two countries differ (difference in endowments)

3. Technology is the same among countries (a long-term assumption)

4. Tastes are the same.

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