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What are the most prominent international trade theories?

Melodee Shovlin

There are three main theories of international trade: comparative advantage, absolute advantage, and factor endowment.

Comparative advantage is when one country can produce a good or service at a lower opportunity cost than another country. For example, if Japan can produce cars and computers more efficiently than the United States, while the U.S. can produce beef and corn more efficiently than Japan, then it makes sense for Japan to focus on producing cars and computers, while the U.S. focuses on producing beef and corn. By specialising in what they do best, both countries can then trade with each other and benefit from the lower prices of the goods they receive from the other country.

Absolute advantage is when one country can produce a good or service using fewer resources than another country. For example, if India can produce cotton using less labour and land than China, then India has an absolute advantage in producing cotton. In this case, India might choose to sell cotton to China, while China might sell steel to India. Again, this benefits both countries because they can get the goods they need at lower prices than if they tried to produce everything themselves.

Finally, factor endowment theory suggests that a country's relative abundance of labor, capital, and natural resources will determine the goods it exports and imports. For example, if a country has a lot of natural resources and not very much capital or labour, it might export raw materials like oil or iron ore, while importing manufactured goods like cars or computers. On the other hand, if a country has a lot of skilled labour and capital, it might export high-tech products and services, while importing raw materials and low-skilled labour-intensive goods.