International trade models include Adam Smith’s theory of absolute advantage and David Ricardo’s theory of comparative advantage, which has been refined into a neo-Ricardian theory. The Heckscher-Ohlin model emphasizes a country’s resources, while the gravity model considers economic mass and distance between trading partners. Specialization in goods a country is relatively efficient in producing increases productivity and output.
Models of international trade can be traced back at least to the theory of absolute advantage advanced by Adam Smith. This theory showed that it would be beneficial for a country to specialize and engage in international trade if it was able to produce some goods more efficiently than its trading partners. This theory was further developed by David Ricardo’s theory of comparative advantage, which showed that a country should specialize in those goods in which it was relatively efficient in producing. Ricardo’s theory has been further refined in more recent times to produce a neo-Ricardian theory that uses fewer assumptions than the original theory. Other important models of international trade include the Heckscher-Ohlin theory, which emphasizes the importance of factors of production in a country, and the theory of gravity, which looks at the size and proximity of trading partners.
While Smith only showed that international trade was beneficial under certain specific circumstances, Ricardo’s theory showed that it always makes sense to specialize in a country producing those goods and services where it is relatively more efficient. This specialization increases productivity and increases the country’s total output. A country need not have an absolute advantage in producing goods, provided that the opportunity cost of producing the goods is lower than its trading partners in producing the same goods.
Ricardo’s theory of comparative advantage uses numerous assumptions. For example, it assumes that the only contribution to industrial production is labor and that that labor is mobile across industries but not across countries. Modern refinements of Ricardian theory have produced models of international trade that can demonstrate comparative advantage across a wide range of goods and countries, rather than Ricardo’s original model, which used two countries and two categories of goods.
The Heckscher-Ohlin model of international trade emphasizes the resources available in each country and emphasizes the importance of the factors of production in each country. The abundance of factors such as labor or capital in a country determines the type of international trade that the country engages in. The country produces and exports goods that take advantage of factors of production that are abundant and will import those goods that require the input of factors of production that are scarce in the country.
International trade models also include the gravity model which examines the economic mass of each country and the distance between trading partners. The gravity model arrives at a prediction of trade flows between countries based on these elements and other factors such as colonial history between countries that have influenced trade patterns. This model is supported by empirical observations of transactions within trading blocs such as the North American Free Trade Association.
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