Please enable JavaScript.
Coggle requires JavaScript to display documents.
INTERNATIONAL TRADE THEORIES - Coggle Diagram
INTERNATIONAL TRADE THEORIES
Absolute Advantage
Main Idea
Countries should specialize in producing goods they can produce more efficiently than others.
Pros
Promotes specialization and efficiency; increases total output.
Cons
Doesn’t explain trade when one country has absolute advantage in all goods.
Comparative Advantage
Main Idea
Even if a country has an absolute advantage, trade can be beneficial if it focuses on goods with the lowest opportunity cost.
Pros
Promotes specialization and efficiency; increases total output.
Cons
Doesn’t explain trade when one country has absolute advantage in all goods.
Heckscher-Ohlin (Factor Proportions)
Main Idea
Countries export goods that use their abundant and cheap factors of production, and import goods that use their scarce factors.
Pros
Explains trade patterns based on factor endowments; useful for developing countries.
Cons
Empirical validity questioned (Leontief Paradox); ignores economies of scale.
Product Life Cycle Theory
Main Idea
Products go through a cycle (introduction, growth, maturity, decline), and trade patterns change accordingly.
Pros
Explains changes in trade over time and innovation-driven exports.
Cons
May not apply to all products; global production is now more simultaneous.
New Trade Theory
Main Idea
Economies of scale and network effects can lead to trade even among similar countries.
Pros
Explains intra-industry trade; emphasizes role of large firms and innovation.
Cons
Can support protectionism for infant industries; less focus on factor endowments.
Porter's National Competitive Advantage (Diamond Model)
Main Idea
Competitive advantage arises from four national determinants: factor conditions, demand conditions, related industries, and firm strategy.
Pros
Highlights role of innovation, institutions, and strategy; focuses on firm-level factors.
Cons
Complex and hard to quantify; less applicable to low-tech industries.
Gravity Model
Main Ideas
Trade flows are influenced by the economic size and proximity of countries.
Pros
Matches real-world trade patterns well; widely used in empirical studies.
Cons
Lacks explanation of why trade occurs; more descriptive than theoretical.