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International Trade Theory |
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International trade theory includes various models that determine the structure and patterns of the international trade theory. The international trade theory also reflects the effect of various trade tariffs as well as different policies that are imposed by the Government from time to time on international trade. There are different models proposed by various researchers and economists of the world.
The Heckscher-Ohlin model is one of th most popular international trade theory models that was proposed by Eli Heckscher and Bertil Ohlin.
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The Heckscher-Ohlin model was given as an alternative model to the Ricardian model which was based on comparative advantage. One of the main drawbacks of this model was its complexity, although it was not able to give accurate predictions. However the inclusion of 'neoclassical price mechanism' in the international trade theory has made this model most significant while considering the theoretical aspect of international trade. It states that the discrepancies in the factor endowments will decide the structural pattern of the international trade. According to this theoretical model, a country should export those items that are extensively used in the local market. It further states that goods that should be imported must be locally scarce but have demand in the country. The Leontied paradox is the typical empirical difficulty with this international trade theory model.
The Ricardian model is the earliest model proposed to describe the pattern of the international trade theory. The model was based upon comparative advantage which is one of the prime aspects of international trade theory. According to this model, a country focuses on the production of that particular goods for which it is noted. Further the model clarifies instead of producing a wide variety of goods, a country must specialize in production of only one specific goods. Unlike the Heckscher-Ohlin model, factor endowments is not taken into account in this model while describing international trade theory.
The Gravity model is another common international trade theory model. This model specializes in the empirical analysis of various patterns of international trade. The model got its name after the famous law of gravity model by Newton. The theory claims that International trade of a country is proportional to its distance and economic size.
There are yet two other models that describe the international trade theory and analyze its characteristics and pattern. The New Trade theory and the specific factors are also popularly used international trade theory. The new trade theory depicts a picture about the international trade particularly based upon the drawbacks of the previous 2 models. It states that international trade is only carried out between two countries that are at par with each other in terms of factor endowments as well as foreign investments. Monopolistic competition is typically reflected in this model of international trade theory.
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