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There are many theories and concepts associated with international trade.
When companies want to go international, these theories and concepts can
guide them to be careful and prepared.
There are four major modern theories of international trade. To have a brief
idea, please read on.
Moreover, this model also shows that comparative advantage also depends
on production technology (that influences relative intensity). Production
technology is the process by which various production factors are being
utilized during the production cycle.
The Heckscher–Ohlin theory tells that trade offers the opportunity to each
country to specialize. A country will export the product which is most
suitable to produce in exchange for other products that are less suitable to
produce. Trade benefits both the countries involved in the exchange.
There are three factors in this model − Labor (L), Capital (K), and Territory
(T).
Food products are made by using territory (T) and labor (L), while
manufactured goods use capital (K) and labor (L). It is easy to see that labor
(L) is a mobile factor and it can be used in both sectors. Territory and capital
are specific factors.
A country with abundant capital and a shortage of land will produce more
manufactured goods than food products, whatever may the price be. A
country with territory abundance will produce more foods.
Trade gains are bigger in the export sector and smaller in the competing
import sector.
The presence of the relative global supply curve stemming from the
possibilities of production.
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The exchange rate is obtained by the intersection between the two curves.
An improved exchange rate – other elements being constant – implies a
substantial rise in the welfare of that country.
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