What does international trade theory suggest about the implications of this trend for economic growt

The raw material of the series is drawn mainly from IMF Working Papers, technical papers produced by Fund staff members and visiting scholars, as well as from policy-related research papers. This material is refined for the general readership by editing and partial redrafting. Globalization—the international integration of goods, technology, labor, and capital—is everywhere to be seen. In any large city in any country, Japanese cars ply the streets, a telephone call can arrange the purchase of equities from a stock exchange half a world away, local businesses could not function without U.

What does international trade theory suggest about the implications of this trend for economic growt

Read more Comparative advantage It can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialise in producing.

Comparative advantage is a term associated with 19th Century English economist David Ricardo. Ricardo considered what goods and services countries should produce, and suggested that they should specialise by allocating their scarce resources to produce goods and services for which they have a comparative cost advantage.

There are two types of cost advantage — absolute, and comparative.

What does international trade theory suggest about the implications of this trend for economic growt

Absolute advantage means being more productive or cost-efficient than another country whereas comparative advantage relates to how much productive or cost efficient one country is than another. Example In order to understand how the concept of comparative advantage might be applied to the real world, we can consider the simple example of two countries producing only two goods - motor cars and commercial trucks.

Comparative advantage Using all its resources, country A can produce 30m cars or 6m trucks, and country B can produce 35m cars or 21m trucks. This can be summarised in a table. In this case, country B has the absolute advantage in producing both products, but it has a comparative advantage in trucks because it is relatively better at producing them.

Comparative advantage

Country B is 3. However, the greatest advantage - and the widest gap - lies with truck production, hence Country B should specialise in producing trucks, leaving Country A to produce cars. Economic theory suggests that, if countries apply the principle of comparative advantage, combined output will be increased in comparison with the output that would be produced if the two countries tried to become self-sufficient and allocate resources towards production of both goods.

The gradient of a PPF reflects the opportunity cost of production. Increasing the production of one good means that less of another can be produced.

The gradient reflects the lost output of Y as a result of increasing the output of X. Only when the gradients are different will a country have a comparative advantage, and only then will trade be beneficial. In this case, international trade does not confer any advantage. Criticisms However, the principle of comparative advantage can be criticised in a several ways: It may overstate the benefits of specialisation by ignoring a number of costs.

These costs include transport costs and any external costs associated with trade, such as air and sea pollution. The theory also assumes that markets are perfectly competitive - in particular, there is perfect mobility of factors without any diminishing returns and with no transport costs.

Key findings

The reality is likely to be very different, with output from factor inputs subject to diminishing returns, and with transport costs. This will make the PPF for each country non-linear and bowed outwards.

If this is the case, complete specialisation might not generate the level of benefits that would be derived from linear PPFs.1 The Theories of International Business International trade encompasses many aspects in relation to various countries.

There are many theories regarding international trade. Some of these include mercantilism, absolute advantage, comparative advantage, factor proportions theory, international product life cycle, new trade theory and national. Adam Smith's The Wealth of Nations showed how international trade increases the wealth of an economy.

What does international trade theory suggest about the implications of this trend for economic growth in those developed nations? Comments: When production of commodity-like components began to shift from the U.S. to low cost locations in the early s, many . What Does International Trade Theory Suggest About The Implications Of This Trend For Economic Growth In Those Developed Nations Case Discussion – Chapter 5 Trade in Information Technology and U.S. Economic Growth 1. The neoclassical theory of exogenous economic growth (Solow, ; Swan, ) does not recognise the role of trade in economic growth in that it assumes that growth is driven by an increase in the use of factor inputs, capital and labour, and the exogenous improvements in technology.

Any mechanism designed to slow international trade will have the effect of reducing economic growth. respectively has also increased the opportunities for international trade and investment. The increase in international business activity has contributed to significant growth in .

Fall Harvey Lapan.

Finance & Development, September - Trade, Growth, and Poverty

Paper Topics for Econ TOPIC: Any topic related to International Theory or Policy is potentially acceptable. You must submit a written proposal before writing the paper so that I approve the topic; this proposal is due October 14, The founders of GATT believed that increased international trade would promote an economic interdependence between countries, making wars between trading partners unthinkable.

GATT was responsible for reducing the international tariff average from 40 percent in to 5 percent in production and trade as North America becomes energy sufficient.

Increasing water scarcity in the future in large swathes of the developing world may mean that the long-term decline in the share of food and agricultural products in international trade might be arrested or even reversed.

Trade in information technology & U.S econoic growth by Nkuli Nqana on Prezi