Answer To: 1. what is technological gap,its significants in international tradeand analysis of its model?...
David answered on Dec 23 2021
Chapter 01
THEORIES OF
INTERNATIONAL TRADE
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CHAPTER-01
THEORIES OF INTERNATIONAL TRADE
Introduction:
Trade is also called the exchange of goods economy, is to transfer of the
commodities from one person to another. Sometimes trade is also called in simple
terms as commerce or financial transaction of barter. Where the transfer of the
commodities between the persons took place is called a market. If we through light on
the history of trade, the original form of trade was barter, where direct exchange of
goods and services took place. With the passage of time the barter system was
replaced by the money exchange system in which the commodities are transferred
through a medium of exchange such as money. By the invention of money the trade
got greatly promoted. The trade between, two traders or two economies is called
bilateral trade, while the trade between more than two countries are more than two
economies is called multilateral trade. The fundamental trade is to explain why the
two persons or the two nations trade with each other respectively. As the nature has
distributed the resources unequally on the surface of earth. Therefore, it is quite
difficult that each and every nation can produce all the commodities which its people
require for their consumption.
International trade is not a new concept; history has already suggested that in
the past it has several instances. But with the help of modern techniques, highly
advanced transportation, outsourcing of manufacturing goods and services and fast
track industrialization, the international trade has got momentum and is growing and
spreading very fast. Trade is essential for the satisfaction of human wants. Trade is
conducted not only for the sake of earning profile. It also provides services to the
consumers. Thus trade is an important social activity because the society needs un-
interrupting supply of goods forever increasing and ever changing but never ending
human wants. Trade has taken birth with the beginning of human life and shall
continue as long as human life exists on the earth. It enhances the living of standard of
living of consumers. Thus we can say that trade is a very important social activity.
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Different Types of Trade
Trade is broadly divided between two types:
1. Internal or Home or Domestic Trade.
2. External or Foreign or International Trade.
1. Internal Trade: Internal Trade is also known as Home Trade. It took place
within the political and geographical boundaries of a country. It can be at local
regional or national level like the trade between Delhi and Mumbai etc. The
internal trade can also be subdivided into two groups.
(A) Wholesale Trade: In this type of trade the commodities are bought in
large quantities from the manufacture or the produce and then sold to
the retailers for resale to consumers. The wholesaler works like
mediator between the manufacture and the retailer. The wholesaler has
its prominent place in this type of trade because both the manufacture
and the retailer are dependent upon him.
(B) Retail Trade: In this trade the wholesaler is the chief distributer who
distributer the commodities in small amounts to the retailers and then
sellers sold the commodities to the persons for their personal use.
2. External Trade: External trade is also called foreign trade or international
trade. In this type of trade the commodities are exchanged between two or
more than two countries e.g. if Mr. X who is a trade from one of the states of
India, Mumbai sells his goods to Mr. Y who is a trader of New York is one the
Trade
Home
Trade
Wholesale
Trade
Retail
Trade
Foreign
Trade
Import
Trade
Export
Trade
Enter pot
Trade
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state of U.S.A. Thus, we can very easily understand the concept of
international trade or External Trade. It can also be further divided into three
main groups:
(A) Export Trade: When the commodities are sold from home country to
another or foreign country is called export trade e.g. when we sell the
Indian goods to U.S.A in this case India is the home country or
importer. This is simply all about the export trade.
(B) Import Trade: In this case the home country purchase goods from the
foreign country and then the home country e.g. India in the importer
and foreign country e.g. U.S.A in the exporter. This is called the
Import trade.
(C) Enter pot Trade: This is some kind of interesting type of trade. In this
trade the goods are imported from one country and then after doing
some modifications or after furnishing the goods and then again
exported to the country from where we have imported the commodities
is called enter pot trade.
Now, up to some extent we are in position to answer the
questions what is trade? What is International trade and itstypes? But
still we have one question to answer that why international trade does
takes places.
Trade originated with human communication from pre-historic
times. Trading was the main facility of pre historic people, who
bartered goods and services from each other before the innovation of
modern day currency. Peter Watson dates the history of long distance
commerce from 150,000 years ago.Undoubtedly trade have taken place
as the human history dates back. Any how there are no such recorded
evidences or theories as for as the international trade is concerned, and
it is believed that the economies or any terms which are related to
economies had been stated in 1776, when “The wealth of Nations” was
published by Adam Smith in 1776. After this a new phenomenon or a
new authentic and logical perception about all the economic activities
took place in a society.Same with theregional trade or international
trade. There is no such authentic theory before Adam Smith, although
almost all the school of thoughts before AdamSmith admired the trade
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and also gave trade the most important place. Hebrews, Plato, Aristotle
the prominent economists of Roman School of thought like LUCIUS
ANNAEUS SENECA, Marcus Tullius Cicero, Pliny The Elder etc.
have also appreciated the trade in their times and also stated that trade
was quite transparent and justifiable in their period. They also
proposed that trade is an essential entity of any kind of society. The
medieval economic thinkers also shown their reasonable interests
towards trade and try to state or express or implement the trade in a
moral and ethical manner.
Then, the modern Economic thinkers came into existence by
the name of mercantilists and shown great interest towards trade and
expressed trade thoroughly in which they stated that the trade took an
international character and it became the only basis of domestic and
foreign policies of a nation. For the Mercantilists international trade or
trade is only way to improve the society in all aspects. They only and
only believe on trades, nothing else. They were also in favour of
maximum export and minimum import, to collect the largest balance.
Thus, it is cleared by the mercantilists that first importance should be
gone to foreign trade for obtaining gold and silver from the other
countries. The manufactures and other factors of productions came on
number second and so on.
In the middle of the 18th century a new system of economic
thought developed in France by the name of physiocrates. This system
is also known as Physiocracy. The Physiocrates were the sitter
criticisers of Mercantilists or Mercantilism who supported foreign
trade blindly without understanding the real or natural order. But
physiocrates were the followers of natural order and unlike
Mercantilists, the physiocrates laid their stress on the importance of
agriculture, but they never ignore the importance of trade for the
betterment of a society. Finally, we can say that trade remains always
the matter of importance for every school of thought or in other words
it is clear that trade has great importance from the human existence to
till now.
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After 1776 when one of the famous classical economists Adam
Smith published his book “wealth of nations”. In this book he
propounded all facts and queries of the economic world in a very
sensitive and logical manner for which he is also known as the father
of Economics. Adam Smith almost covered every aspect of the society
but if we took one aspect under consideration. That what are the views
of Adam Smith about trade. Adam Smith developed his theory of
international trade in a realistic manner in which he attacked the
mercantilist’s views on what constituted the wealth of nation and what
contributes the increasing wealth and welfare of nations. His theory of
international trade is called the Absolute Advantage Theory.The
economists of classical school badly criticised the doctrines of
mercantilism and favoured free trade which benefited all the trading
countries. In their theory of international trade the classical economists
tried to explain two basic problems.
Adam Smith advocated the Laissez fair economic policy. He
argued that the wealth of nation would expand rapidly if the
government would check the mercantilist controls over foreign trade.
Smith also pointed out one of mercantilist myth that in international
trade only one country can gain at the cost of other countries. He
stressed his theory mostly on the division of labour in which he
assumes that every person would get skilled in his particular field if the
division of labour implemented consciously. He also said that everyone
will get better off without making any one worse off. Smith model of
world trade is as peace model among the countries of the world in
which free trade and honesty being the basic contents of the model
made it most preferable and productive also.
The Principle of Absolute Advantage refers to the capacity or
an ability of a party (an individual, or firm or a country) to produce the
maximum goods or services than competitors using the same amount
of resources. In the Principles of Absolute Advantage only one input
i.e. labour is used.Adam Smith postulated in his book the wealth of
Nation’s that under free trade each nation should specialize in the
production of those goods that it could produce most efficiently and
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some of those would be exported and in exchange of which we can buy
some other commodities which we cannot manufacture or whose
manufacturing is most costly.
Let us now discuss the Smith model with the help of an example:
For the sake of simplicity here we will take two countries, two
commodities and the factor of production will remain same i.e. labour.
The countries are U.S.A andIndia, the commodities are rubber and
textiles. The production of these two commodities in these two
countries. There are constant returnsto scale conditions in both the
countries in respect of both the goods. If we talk about the production
possibility of...