International trade allows to expand the market for goods and services that may not be available to us. That is the reason why you can choose between Japanese, German or American cars. As a result of international trade, the market contains greater competition and therefore more competitive pricing, which brings home cheaper products to consumers such as modern international trade theory.
What is International Trade?
International trade is the exchange of goods and services between countries. This type of trade raises the world economy, where prices, or supply and demand, affect and are influenced by global events. Political changes in Asia, for example, can lead to an increase in labor costs, thereby increasing production costs for American shoe-based companies based in Malaysia, which will then result in an increase in the price you have to pay to buy. tennis shoes at your local mall. A decrease in labor costs, on the other hand, will result in you having to pay less for your new shoes such as international trade barriers.
Global trade gives consumers and the country an opportunity to be exposed to goods and services that are not available in their own country. Almost every product type can be found in international markets: food, clothing, spare parts, oil, jewelry, wine, stock, currency, and water. Services are also traded: tourism, banking, consulting, and transportation. Products sold to global markets are exports, and products purchased from global markets are imported. Import and export are recorded in a country's current account in the balance of payments such as modern international trade theory.
Improving Global Trade Efficiency
Global trade allows rich countries to use their resources whether labor, technology or capital more efficiently. Because countries are blessed with different assets and natural resources (land, labor, capital and technology), some countries may produce the same goods more efficiently and therefore sell them cheaper than other countries. If a country can not efficiently produce goods, it may obtain such goods by trading with another country which may. This is known as a specialization in international trade.
Types of Interational Trade
According to the theory, there are actually 7 types of international trade, namely:
1. Mercantilism
The oldest of all theories of international trade, Mercantilism, dates back to 1630. At that time, Thomas Mun stated that the economic power of any country depends on the amount of silver and gold holdings. Larger is the more economically, economically independent of a country. Furthermore, the idea of supporting greater exports and promoting efforts to minimize imports is also included in the same theory.
The thinking behind this concept is evident as you pay imports from the payments you get from exports. So, if you have many countries to pay for imported products, then those products will be exported, the economy will tend to lead to declination. Although the view is old but the roots of modern thinking on finance is deeply embedded in it as the goal of a country's international trade.
2. Absolute Benefits
It is a type based on the idea of increasing efficiency in the production process. In 1776, Adam Smith, a renowned financier today, proposed the theory that the manufacture of products with high efficiency compared to other countries in the world is very profitable. This concept can only be understood by the idea that if two countries specialize in the exact same type of product.
But products from one country that are better in quality or lower prices will bring a tremendous absolute advantage for the country compared to others. From another point of view, if two countries specialize in completely different products, they can quickly increase their influence in their area by trading with each other (by creating an absolute advantage at both ends).
3. Comparative advantage
Compared with absolute advantage, Comparative Advantage supports relative productivity. According to this concept, as David Ricardo put it in 1817, a country with maximum absolute advantage in the creation of more than one product compared to another, can still trade with other countries in an inefficient way to create the product, it is readily available at first, to increase its productivity.
To illustrate this idea with an example, let's say I have expertise in two fields like designing and writing graphics, where the design allows me to earn more than write. Bearing in mind that I can work on one side at a time, I will most likely hire a writer, and we will both work in a comparative atmosphere.
4. Heckscher-Ohlin Theory
Both the theory of absolute and comparative international trade assume that the choice of products that can prove itself to be a great advantage is led by a free and open market rather than using the resources available in the interior. That's what causes Bertil Ohlin and Eli Heckscher to put forward the idea of pricing that depends on the difference in supply and demand.
This can be understood as, if the supply of a product grows larger than the demand in the market, the price falls and vice versa. Thus, a country's exports must primarily consist of abundant products available in it, and imports should count products that are in great demand. Since, this concept ensures the utilization of state factors such as labor, land and sources of funding for the purpose of making the product is therefore also known as the "theory of factor proportions."
5. Product Life Cycle Theory
In the 1970s, Raymond Vernon introduced the idea of using the product life cycle to explain the patterns of global trade, in marketing. According to theory, as demand for newly created products grows, the country of origin begins to export them to other countries. Where as demand grows, local manufacturing plants are opened to meet the demand. And the scenario covers the whole world from time to time, thus making the product a standardization.
You can take computer samples to understand how they work. Personal computers previously appeared in 1970 only available in some countries and from the 1980s to the 1990s, the product moved through a stage of maturity in which production spread to many other countries. And now in the 21st century, every third house has a PC in it.
6. The Theory of Global Strategic Rivalry
The ongoing evolutionary behavior of international trade theory brings us back to the 1980s where Kalvin Lancaster and Paul Krugman introduced the concept of strategy, based on global level competition, targeting multinational corporations and the struggles needed to achieve higher excellence than other international companies .
According to the concept, the new company needs to optimize some of the factors that will lead the brand in overcoming all the obstacles to success and gain influential recognition in the global marketplace. In all these factors, thorough research and timely developmental measures are essential. In fact, having complete proprietary rights over intellectual property is also required. Furthermore, the introduction of unique and useful methods for the manufacture and control of access to raw materials will also be useful on the road.
7. National Competitive Advantage Theory
Michael Porter in 1990 suggested that the success of any business in international trade relies on upgradable capacity and industry innovation and four other factors, which determine how the company will perform in this global race. The main concept behind this theory gives the nuance of holding the proportion of factors as well as many other international trade theories.
One such factor is the availability of resources in local markets and their prices necessary to provide a stable and stable environment for trade to grow. In addition, the company's ability to face competitors and its capacity to improve itself also determines the level of success of the brand. In addition, keeping track of changes in demand and the behavior of local suppliers is also important.
