23032020INM552 (MACROECONOMICS)
Abhijit Paul ID NO:- 19IUT0160050 MBA Sec :- A
1. Why international trade occurs?
International trade occurs because the domestic economies of different nations possess different
competitive advantages, and by specializing in the production of what they have an advantage in
and trading with other countries that have different advantages that they don’t, both trading
partners are better off. Few reasons of occurrence of international trade are:-
a) Differences in Technology
Advantageous trade can occur between countries if the countries differ in their technological
abilities to produce goods and services. Technology refers to the techniques used to turn
resources (labor, capital, land) into outputs (goods and services).
b) Differences in Resource Endowments
Advantageous trade can occur between countries if the countries differ in their endowments of
resources. Resource endowments refer to the skills and abilities of a country’s workforce, the
natural resources available within its borders (minerals, farmland, etc.), and the sophistication of
its capital stock (machinery, infrastructure, communications systems).
c) Differences in Demand
Advantageous trade can occur between countries if demands or preferences differ between
countries. Individuals in different countries may have different preferences or demands for
various products.
d) Existence of Economies of Scale in Production
The existence of economies of scale in production is sufficient to generate advantageous trade
between two countries. Economies of scale refer to a production process in which production
costs fall as the scale of production rises. This feature of production is also known as “increasing
returns to scale.”
e) Existence of Government Policies
Government tax and subsidy programs alter the prices charged for goods and services. These
changes can be sufficient to generate advantages in production of certain products. In these
circumstances, advantageous trade may arise solely due to differences in government policies
across countries.
3. Why are international trade theories important?
International trade theories are important because they have helped economists, governments,
and businesses better understand international trade and how to promote, regulate, and manage it,
these theories are occasionally contradicted by real-world events. Countries don’t have perfect
advantages in many areas of production or services and, in fact, the factors of production aren’t
neatly distributed between areas. Some countries have a unbalanced benefit of some factors. In
practice, governments and companies use a combination of these theories to both interpret trends
and develop strategy in terms of international trade.
4. What are the classical theories of international trade?
i. Absolute Cost Advantage Theory :-
Adam Smith’s theory of absolute cost advantage in international trade was evolved as a
strong reaction of the restrictive and protectionist mercantilist views on international
trade. He upheld in this theory the necessity of free trade as the only sound guarantee for
progressive expansion of trade and increased prosperity of nations. The free trade,
according to Smith, promotes international division of labour.
ii. Comparative Cost Advantage Theory:-
Ricardo considered what goods and services countries should produce, and suggested that
they should specialise by allocating their scarce resources to produce goods and services
for which they have a comparative cost advantage. There are two types of cost advantage
– absolute, and comparative.
