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Traditional International Trade Theories
In international trade, there is no one theory that can alone describe the pattern. All traditional international trade theories along with contemporary ones work together to support the concept of globalization and allow you to look at international trade with a different view point. |
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Traditional International Trade Theories:
- Ricardian Model: This model is constructed such that only difference between countries is their production technologies. All other features are taken as identical. The Ricardian model states that the international trade will occur between countries and will be advantageous but the reason why countries trade is because of differences in production technology.
Most traditional international trade theories suggest that some people would benefit and some would lose because of international trade, the Ricardian models shows that everyone could benefit from international trade.
- The Heckscher-Ohlin (Factor Proportions) Model: This model was originally developed by two Swedish economists, Eli Heckscher and his student Bertil Ohlin in the 1920s. Thereafter, many elaborations were provided in the model. This model incorporates a number of realistic characteristics of production that are left out of the Ricardian model. In Heckscher-Ohlin model begins by expanding the number of factors of production. It assumes that labor and capital are used in the production of final goods. Here, capital refers to physical machines, equipment, computers, office building, office supplies and much more are considered to be capital.
In a capitalist economy most of the physical capital is owned by individuals and businesses. This model assumes private ownership of capital and states that use of capital in production will generate income for the owner while the workers earn wages for their efforts in production. The model assumes that the ratio of quantity of capital to the quantity of labor used in the production process is the capital-labor ratio, and different industries producing different goods have different capital-labor ratios. It is this ratio of one factor to another that gives the model its generic name -- the Factor Proportions Model.
- The Specific Factor Model: This model was originally discussed by Jacob Viner and is considered to be a variant of the Ricardian Model. This model assumes that one factor of production is specific to a particular industry. A specific factor is one which is stuck in an industry or it is immobile between industries in response to the changes in the market. A factor can be immobile between industries for a number of reasons like capital or specifically trained labor for use in the production process and it can be impossible or quite difficult to remove these factors across industries.
The Specific Factor Model is primarily designed to show the effects of trade in an economy in which one factor of production is specific to one industry.
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Traditional International Trade Theories
The increasing globalization of business has created a need for tutorial on globalization and international business. Many online institutions are now offering opportunities to people world over to learn as much as possible about globalization and international business. 