Download paper

International Trade And Comparative Advantage Economics Essay

Categories: Economics

International Trade is the interchanging procedure of goods, and services across the international boundary line. In 2010, the value of international pace achieved 19 trillion ( US ) dollars that is approximately 30 % of the universe GDP ( Abedini, n.d. ) . That is about one tierce of production of goods and services are exchanged internationally around the universe. International trade is the exchange between two people or entities in two different states. International trade theories are different type of theories that explain international trade ( New Charter University, 2012 ) .

Peoples want to interchange goods and services because they believe that they get benefit from the exchange. Many economic experts believe that the engagement in international trade addition productiveness. Trade theoretical work suggests that the degree of productiveness and growing may increase through its effects on engineering. There are many part of international trade, which lead to technological alteration and this increased the rate of economic growing. There are chiefly three mechanisms by that engineering alteration: increased competitory force per unit area, incarnation in imports and cognition transportation by commercial contacts ( Sjoholm 1997 )

Economists have developed theories to explicate the mechanisms of planetary trade.

The chief historical theories are called classical theory. This is based on state. After some clip theories began to travel to explicate trade from a house or company based non a state position. This is known as modern theory ( New Charter University, 2012 ) .

Categorization of different theories:

hypertext transfer protocol: //



This theory is the earliest theory which developed in the 16th century.

Top Experts
Doctor Jennifer
Verified expert
5 (893)
Writer Jennie
Verified expert
4.8 (467)
Tutor Janice
Verified expert
4.9 (549)
hire verified expert

Harmonizing to this theory a state ‘s wealth is determined by the sum of its gold and Ag retention ( New Charter University 2012 ) . Mercantilist believed that a state should increase its gold and Ag by the addition of export and detering the import ( 7 ) . The chief intent of each state was to hold trade excess, and avoid a trade shortage. Through a signifier of neo-mercantilism states such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports ( New Charter University, 2012 ) .

Absolute advantage

Adam Smith offered a new theory called absolute advantage. This theory stated that a state focal point on the ability to bring forth a good more expeditiously than another state ( New Charter University, 2012 ) . He said that trade should follow of course harmonizing to market forces. For illustration if one state bring forth a good cheaper and faster as comparison to other so it is better to concentrate on specialisation on bring forthing that good. Smith ‘s theory said that addition the specialisation in both states would profit for both states and trade should be besides encouraged ( 7 ) . This theory province that a state wealth can non be step by how much gold and silver it had but by the life criterions of its people can be step.

Comparative advantage

David Ricardo, introduce the theory of comparative advantage in the 1817 ( New Charter University 2012 ) . This theory stated that if merely one state had the absolute advantage in the production of more than one merchandise, specialisation and trade could still happen between two states.

When a state can non bring forth a merchandise more expeditiously than the other state than comparative advantage occurs. It can bring forth that merchandise better and more expeditiously than it does other goods ( Voss & A ; Voss, 2008 ) . This theory explains that how states through imports can increase their public assistance by at the same time selling goods and services in international market ( 7 ) . Two states can acquire profit even if one state could bring forth all goods with fewer resources. The other, supply the comparative efficiency with which goods can be produce differs between the two states. ( John Sloman )

Heckscher-Ohlin Theory ( Factor Proportions Theory )

Eli Hechscher and Bertil Ohlin, focused their attending on how a state could derive comparative advantage by bring forthing merchandises ( New Charter University, 2012 ) . This theory largely focuses on state ‘s production factors like land, labour, and capital, which provide financess for investing in works and equipment. This theory said that the cost of any resource depend on supply and demand. This theory is besides known as factor proportions theory. States would import goods that were in short supply, but higher demand. For illustration, in China and India labour cost is inexpensive hence these states have become the optimum location for labour intensive industries ( Lee, Qian, Julie, and Ying, 2004 ) .

Modern or Firm-Based Trade Theories

These theories came out after Second World War. Large portion of these theories is developed by concern school professors, non economic expert. The firm-based theories incorporate other merchandise and service factors that include trade name and client trueness, engineering and quality, into the apprehension of trade flows.

Country similarity theory

This theory devolved in 1961 by the Steffan Linder ( New Charter University, 2012 ) . Linder ‘s theory said that consumers in states that are in the same or similar phase of development would hold similar penchants. This theory stated that companies foremost produce for domestic ingestion. It is really hard to happen out similar market as like domestic one, on the footing of client penchant. This theory is utile in decision-making and buying procedures in understanding trade in goods where trade name name and merchandise reputes are most of import factors in the purchasers ‘ .

Product life rhythm theory

This theory stated that every merchandise life rhythm has three distinguishable phases: new merchandise, maturating merchandise, and merchandise diminution. This theory developed by Harvard Business School professor Raymond Vernon ( New Charter University, 2012 ) .

Global strategic competition theory

Economist Paul Krugman and Kelvin Lancaster present this theory in 1980 ( New Charter University, 2012 ) . This theory based on MNCs and their attempts to derive a competitory advantage against other planetary houses in there industry.

Porter ‘s national competitory advantage theory

In 1990 Michael Porter of Harvard Business School developed a new theoretical account of explain national competitory advantage ( New Charter University, 2012 ) . This said that a state ‘s fight in an industry depends on the capacity of the industry to introduce and upgrade. Porter identified four determiners that he linked together ( Smit, 2010 ) . The four determiners are local market resource and capablenesss, local market demand conditions, local provider and complementary industries and local house features.

hypertext transfer protocol: // ( 15 )

Premises of comparative advantage:

Comparative advantage theory is helpful to do a figure of premises.

This theory said that there are no transit costs or can state transit dramatis personae are ignored.

Largely all costs are invariable and there are no economic systems of graduated table.

There are merely two economic systems making two goods.

This theory assumes that all traded goods are homogenous.

This theory assumes that factors of production are assumed to be absolutely nomadic.

This theory assumes that no duties or other trade barriers.

This theory provides perfect cognition, so that every purchasers and Sellerss know where they can acquire cheapest goods internationally.

This theory assumes labour is absolutely nomadic within the state but absolutely immobile between states.

Doubling the inputs in each state leads to a doubling of entire end product of company.


New Zealand is to a great extent dependent on international trade. Currently import protection of New Zealand is low. Vernon was the first to who alarm to lifting importance of statute cognition and cardinal accomplishment as a platform for the merchandise rhythm, outsourcing, away shoring and franchising. New Zealand has pay ratios that are less or more typical of the North. So there is one inquiry came out, how can New Zealand houses and authorities program future trade capableness in this planetary market environment? The big states non depend on the external sector every bit much as the little states. Small states depend on the external sector to accomplish higher economic growing and keep a higher living criterion.

New Zealand ‘s is besides non possible to bring forth good economic it is besides dependent on its international fight. New Zealand is dependent on export achieve sustainable growing. The major part of New Zealand ‘s external trade of export income comes from bulk trade goods such as meat and dairy merchandises, wood and mush ( 9 ) . Primary trade goods still dominate New Zealand ‘s export- in the 60 ‘s the portion of primary trade goods was over 85 % . Now yearss, New Zealand ‘s land-based export is 67 % . ( 9 ) In other developed states the primary export portion is diminishing as fabrication but service exports are lifting.

New Zealand produces a big measure of primary trade goods because of good natural resource gift. The primary sector of New Zealand to export is agricultural, horticultural, and forestry industries ( 9 ) . The homogeneous nature of the New Zealand agriculture and forestry sectors and New Zealand focal point in research, development and invention in these sectors that can better the export fight.

This focal point has positive deduction for economic systems of graduated table. Between 1999 and 2007 the New Zealand gained and lost comparative advantage in more than 200 merchandises ( 10 ) . This information suggests that New Zealand exporters want to alter market demands and chances. Beyond the primary merchandise sector New Zealand has non diversified.

New Zealand ‘s economic developments start since the late ninetiess by the chance to sell primary merchandise merchandises like wool, dairy merchandises and meat to the United Kingdom and other industrialised states ( 9 ) . But after the Second World War the demand for nutrient and industrial natural stuffs was increased. This demand increased export activities of many states including New Zealand.

Analysis of export and import of New Zealand

Export and import can be a great manner to bury into new market and expand concern. New Zealand context, policy-induced deformations are possibly less outstanding on the imports side than the exports side. New Zealand exports statistics step gross revenues by resident houses and persons to non-residents. The incomes of New Zealand include in investing income instead than exports in balance of payment statement. New Zealand is to a great extent dependent on agricultural merchandises. More than tierce of the universe ‘s international dairy trade leads by New Zealand.

More than 100 million people feed dairy merchandise. New Zealand dairy industry contributes 25 % of export net incomes ( 12 ) . In 2009 New Zealand ‘s entire exports amounted to $ 26.25 billion, its entire imports came in at $ 24.29 billion ( 11 ) . In December 2011 New Zealand sum export grew by 9.6 % to make $ 47.7 billion. Australia is the largest exports market for New Zealand, taking 22.7 % of New Zealand ‘s exports. New Zealand ‘s 2nd largest market for export is China. New Zealand about export 12.3 % to china and New Zealand ‘s export to the China grew by over $ 1 billion in 2011 ( 13 ) . New Zealand export to the USA 8.4 % of its entire export.

In the twelvemonth of December 2011 the entire imports of New Zealand, valued at $ 44.5 billion. China has good market and New Zealand imports from China were valued at $ 7.049 billion. New Zealand sourced 15.8 % of its entire imports from China. The import from Australia fell by $ 300 million to $ 7.039 billion. The chief factor contributed to this diminution was the bead in NZ ‘s mineral fuel import. New Zealand import valued from the USA at $ 4.8 billion. New Zealand import 10.7 % of its entire import from the USA.

New Zealand has strongest revealed comparative advantage in merchandise based on the agribusiness, gardening, fishing or forestry industries. These include figure of merchandise like dairy merchandise, in peculiar milk, milk pulverization butter and cheese. These include meat, frozen sheep, beef offal and many more seafood like mussels, crayfish, and frozen fish. These besides include many sort of wool like combed, narration and oily wool ( 10 ) . Some horticultural based merchandises including fresh fruit, trefoil, frozen veggie, onions, and honey and rye grass seeds included in comparative advantage.

A figure of wood merchandises these primary-based merchandises rely on comparatively sophisticated invention inputs such as research and development. Dairy merchandises are a good illustration in New Zealand ‘s invention in production, processing, packaging, distribution, logistics ( 10 ) . New Zealand besides has expertness in these countries to develop a high comparative advantage in certain intricately transformed industries. These contain machines for cleansing, screening, scaling, and dairy machinery, agricultural and bee-keeping works, and milking machines. New Zealand has really good comparative advantage in a truth of fabricating merchandise and these industries are intermediate or capital good used by concerns instead than families ( 10 )

( 9 )


The purpose of this text is to supply more penetration on the construct of international trade and its impact in planetary economic system. Several theories have been forwarded to explicate the morning of this planetary phenomenon act uponing the New Zealand trade and concerns around the universe. Although the theories have started from the classical position point stemming from the fact that trade has it is based on states, it should germinate to embrace the thought that organisational position seems more executable. The continuum explicating the coming of international trade started mercantile system recommending the demand to promote export and deter import but with many unfavorable judgments from the sire of Economics Adam Smith with his Absolute advantage theory which seemed much vanguards at that clip.

The comparatively recent theory adding to the literature of International Trade is that of Porter ‘s national competitory advantage theory prophesying the importance of national competitory theory of an industry to invariably introduce. Theories proposed by great research workers have been legion – each criticizing or adding to the bing literatures. However, it can non be denied that in this epoch of globalisation and mutuality of states, international trade has become the cant of most economic experts. Despite unfavorable judgments and its certain drawbacks, International Trade is now a dominant factor in the planetary market place and nearly-if non all-countries have adopted it. As an stoping word, it can be said that International Trade is here to remain.

Cite this page

International Trade And Comparative Advantage Economics Essay. (2020, Jun 02). Retrieved from

Are You on a Short Deadline? Let a Professional Expert Help You