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International trade is the exchange of capital, goods, and services across international borders or territories. international trade has existed throughout history (for example Uttarapatha, Silk Road, Amber Road, salt roads), its economic, social, and political importance has been on the rise in recent centuries. To understand the pattern in international trade, Different trade theories are postulated. Some famous trade theories are: Mercantilism Absolute Advantage Theory Comparative Advantage Theory Hecksher-Ohlin Factor endowment theory Product Life Cycle Theory New Trade Theory Porter’s Diamond Theory for competitive advantage Restrictions on imports – tariff barriers, quotas or non-tariff barriers. Accumulation of foreign currency reserves and gold and silver reserves. (known also as bullionism) Granting of state monopolies to particular firms especially those associated with trade and shipping. Subsidies of export industries to give competitive advantage in global markets. Government investment in research and development to maximize efficiency and capacity of domestic industry. Allowing copyright / intellectual theft from foreign companies. Limiting wages and consumption of the working classes to enable greater profits to stay with the merchant class. Control of colonies, e.g. making colonies buy from Empire country and taking control of colonies wealth. England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade. All colonial exports to Europe had to pass through English first and be re-exported to Europe. Under British Empire, India restricted in buying from domestic industries and were forced to import salt from the UK. Protests against this salt tax, led to ‘Salt tax’ revolt led by Gandhi. In seventeenth Century France, the state promoted a controlled economy, with strict regulations about the economy and labour markets In the modern world, mercantilism is sometimes associated with policies, such as. Undervaluation of currency e.g. government buying foreign currency assets to keep the exchange rate undervalued and make exports more competitive. Government subsidy of industry for unfair advantage. China has been accused of offering too much subsidised investment for industry, leading to over supply of industries such as steel – meaning other countries struggle to compete. Surge of protectionist sentiment, e.g. tariffs on imports. Copyright theft
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The trade theory that first indicated importance of specialization in production and division of labor is based on the idea of theory of absolute advantage which is developed first by Adam Smith in his famous book The Wealth of Nations published in 1776. Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage. Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold reserves. While there are possible gains from trade with absolute advantage, the gains may not be mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial exchanges. Adam Smith argued that a country has an absolute advantage in the production of a product when it is more efficient than any other country producing it. Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries In economics, principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.
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The trade theory that first indicated importance of specialization in production and division of labor is based on the idea of theory of absolute advantage which is developed first by Adam Smith in his famous book The Wealth of Nations published in 1776. Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage. Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold reserves. While there are possible gains from trade with absolute advantage, the gains may not be mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial exchanges. Adam Smith argued that a country has an absolute advantage in the production of a product when it is more efficient than any other country producing it. Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries In economics, principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.
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