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    Lecture No. 2

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    Otis Melbourn
    The document discusses three main theories of international trade: 1. The theory of comparative costs explains why trade arises based on the costs of production. 2. The price-specie flow theory explains how payments are made between countries with different currencies. 3. The theory of reciprocal demand, also called the equation of international demand, explains how terms of trade are determined and how trading nations divide the gains based on supply and demand between countries.

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    Lecture No. 2

    Uploaded by

    Otis Melbourn
    46 views2 pages
    The document discusses three main theories of international trade: 1. The theory of comparative costs explains why trade arises based on the costs of production. 2. The price-specie flow theory explains how payments are made between countries with different currencies. 3. The theory of reciprocal demand, also called the equation of international demand, explains how terms of trade are determined and how trading nations divide the gains based on supply and demand between countries.

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    The document discusses three main theories of international trade: 1. The theory of comparative costs explains why trade arises based on the costs of production. 2. The price-specie flow theory explains how payments are made between countries with different currencies. 3. The theory of reciprocal demand, also called the equation of international demand, explains how terms of trade are determined and how trading nations divide the gains based on supply and demand between countries.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    46 views2 pages

    Lecture No. 2

    Uploaded by

    Otis Melbourn
    The document discusses three main theories of international trade: 1. The theory of comparative costs explains why trade arises based on the costs of production. 2. The price-specie flow theory explains how payments are made between countries with different currencies. 3. The theory of reciprocal demand, also called the equation of international demand, explains how terms of trade are determined and how trading nations divide the gains based on supply and demand between countries.

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    of 2

    Lecture No.

    2
    Elec 2

    THEORIES OF INTERNATIONAL TRADE

    Three main groups of questions which the important theories seek to provide answers:
    1. Concerned with the reasons why trade becomes possible.
    2. Concerned with the way trade is financed.
    3. Concerned with the advantages of trading, and with the division of these gains among
    the trading countries.

    Theories:
    1. Theory of comparative costs – explains the conditions in which trade will arise.
    2. Price specie-flow theory – explains how payments are made between national currency
    systems.
    3. theory of internal value known as the theory of reciprocal demand – explains how the
    terms of trade are arrived at, and how the gains from trade are divided among nations.

    Doctrine of Comparative Advantage


     Two classical economists that provides answers to the following question: What makes
    goods move from one country to another?
    o David Ricardo and John Stuart Mill
     David Ricardo – extended the principle to the case of two trading nations known as the
    doctrine of comparative advantage. It enjoyed a remarkable advance from the position
    taken by Adam Smith, who perceived “that it pays to import those products which other
    countries can produce at an absolute lower labor cost”, for it provided a basis which
    commodities may be profitably imported or exported.
     According to Ricardo, a country may concentrate upon the production and export of
    those commodities in which its costs were lowest. While each country would import
    those commodities which its labor costs were greatest.
     The principle of comparative advantage or cost may be expressed as follows: A country
    tends to export those products of which it has the greatest advantage or the least
    comparative disadvantage and to import those products in the production of which it
    has the least advantage or the greatest comparative disadvantage.
     Comparative advantage implies a general superiority of one country over the other in
    production.
     Factors responsible for a country’s comparative advantage:
    o Presence of resources – both natural and human
    o People
    o Skill
    o Nation’s capital stock
    o Physical equipment
    o Quality of entrepreneurship
    o Government

    Price-Specie Theory
     Specie flows caused price levels of the trading countries to change, that is, falling in the
    gold-exporting country and rising in the gold-importing country, in accordance with the
    so-called quantity theory of money.
     Increase in prices – better market to sell
     Decrease in prices – in the gold-exporting country – became a cheap market in which to
    buy – poor market wherein to sell.

    The Equation of International Demand


     What determines the ratios at which commodities are exchanged in foreign trade?
    o John Stuart Mill, son of James Mill, evolved his theory of “equation of
    international demand.” He said that “the value of a thing in any place depends
    on the cost of his acquisition in that place.”
     He concluded that the value of a foreign commodity depended on the quantity of home
    produce which must be given for it, or on what he called “terms of international
    exchange.” These terms are affected by the strength of the demand of both countries
    involved in trading.
     Accdg. to Mill, the intensity of this demand determines the quantity of goods which a
    country must export in order to obtain the desired imports.
     The equilibrium in a country’s trade becomes reached when the value of a country’s
    exports pays for all its imports.

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