TRADE THEORIES

Theories of International Trade

Theories of International Trade

Introduction

The world is evolving at a very rapid pace in which hundreds of new technologies are being developed on a daily basis. Globalization is a new concept in which countries are no longer bounded by their physical boundaries. Recent development in technologies and transportation has allowed different countries to trade with each other regardless of the distance between them. Even if two countries are thousands of miles apart, they can communicate with each other almost instantly. There are various channels of communication that enable two different parties living far apart to synchronize their activities and conduct international trade. Developments in transportation allow companies and send and receive products within days at a very economical cost. Even extremely large orders that amount to tons can be traded within a few months to countries that are even separated by the sea.

By the year 2011, international trade had reached a massive US $ 27 trillion (CIA, 2011). There are various benefits to international trading. Firstly, international trade enables countries to specialize in certain goods. Various Management science studies have shown that specialization increases productivity by a large proportion. International trade allows countries to focus on utilizing their natural resources in the most efficient manner, and not focusing on developing goods in which such countries lack experience. For example countries like Iran and Saudi Arabia specialize in the production of oil. They have developed infrastructures, they have trained Human resource personnel and they have invested in top quality machinery to most effectively and efficiently drill out oil. Hence, such countries have a very low unit cost of production. In case international trade was not existent, the oil supply in the United Kingdom would be very expensive. Because of international trade, the United Kingdom can focus on its highly lucrative service industry without having to worry about oil supplies. Such a comparative advantage is beneficial for both countries conducting international trade.

Porter's Diamondand Double Diamond Model

Porter suggests that there are specific reasons for the presence of international competitive advantages of one country over another. The double diamond model incorporates the presence of multinations in the initial Porter's Diamond Model. Porter provides four major determinants to national competitive advantage.

Factors of Production: He suggests that factors of production such as skilled labor and raw materials affect the competitiveness of a country. Certain conditions such as availability of cheap yet highly skilled labor can provide major advantages to a country.

Demand Conditions: If there is a high demand food a company's good in that company's local country, then that company will continuously try to improve quality of the good. The high quality products can then allow such companies to be successful internationally.

Related and supporting countries: If there are industries that support other manufacturing firms, then such manufacturing firms can get access to high quality and cheap raw materials providing them with a competitive advantage.

Firm Strategy, Structure and Rivalry: Certain countries can have a flatter structure providing competitive advantages in certain industries, while ...