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Modern Theory of International Trade (Gains and It’s. The modern theory of international trade is an extension of the general. Gain from International Trade. These are classical or country-based theories and modern or firm-based theories.
CLASSICAL THEORIES OF INTERNATIONAL TRADE International economics, Course 2 1. Adam Smith’s theory of absolute advantage and the use of. Smith’s theory of international trade and compares it with the. MODERN THEORIES OF INTERNATIONAL TRADE PDF View and Downloadable. International Trade Theory. International Terms of Trade. International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a.
Modern Theory of International Trade (Gains and It’s Distribution)The modern theory of international trade is an extension of the general equilibrium theory of value. This theory has been put forward by Bertil Ohlin, a Swedish economist, and it has replaced the traditional comparative cost theory. Just as individuals specialize in economic activity in which they have compara. Bertil Ohlin thus extends the analysis which is applicable to a single market to the determination of values internationally i. He says that the same fundamental principle holds good of all trade, whether it is internal trade or international trade. The classical theory of comparative cost is based on the assumption of comparative immobility of the factors of production as between different countries.
But Ohlin points out that this immobility is to be found even in different regions of the same country. According to Ohlin, the immediate cause of international trade is the difference in commodity prices which in turn is due to the differences in factor prices. Goods are purchased because it cheaper to buy them from outside the country.
The establishment of the rate of exchange between the two countries facilitates the comparison between the commodity prices prevailing in the two countries. Thus, in Ohlin’s opinion there are no fundamental differences but only quantitative differences between inter- regional and international trade. Ohlin’s theory represents a departure from the classical theory and marks a great improvement on it. Gain from International Trade: The gain from international trade depends on the Terms of Trade i.
In the example in the above section, in countries A and B, production with equal units of labour and capital would be: A—2. B—1. 5 tooth- brushes and 1.
Referring back to our equation, we see that 1. Deducting the loss of 5 tooth- brushes from this profit, there is a net gain of 5 to 1. How this Gain is Distributed: This net gain will be normally shared by the two countries. In the above case, the rate of exchange of the two commodities will be somewhere between: 2. In between these two limits, the exact rate of exchange will be decided by the relative bargaining power of A and 3.
The country which is more anxious to secure the goods of the other will be in a weaker bargaining position, and vice versa. In other words, the gain from international trade will be shared according to the reciprocal demand, i. The ratio of exchange of demand will be anywhere between 2. The gain is thus shared by both countries. But the bigger share goes to that country which has an elastic demand for imports and whose exports have an inelastic demand.