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Advantages & Disadvantages of International Trade

The basic model of international trade is structured around the concept of comparative advantage. The theory of comparative advantage holds that mutually advantageous trade between countries will always be available, because trade patterns will be based on relative prices, as opposed to absolute prices, which is based on the theory of absolute advantage, wherein mutually advantageous trade between countries might not always be possible. The reasoning behind the theory of comparative advantage is that no single country can have comparative advantage in all commodities. Initially, the theory was based on labor-cost differentials. Today, it is recognized that both supply and demand factors are at work in the determination of relative prices that establish a basis for a mutually advantageous exchange between countries. In spite of significant changes in economic thought since the eighteenth century, the theory of comparative advantage still stands as an example of sound economic reasoning (Colander, 2003b).

Barriers to trade are obstacles that prevent goods and services from moving freely between countries. Most trade barriers are imposed by national governments, although they are most often imposed at the insistence of or with the support of domestic industry and labor organizations. The major formal barriers to international trade are tariffs and quotas. A tariff is an import tax. It is designed to restrict the flow of goods into a country, by causing them to be too expensive to compete with domestically produced goods. A quota also seeks to restrict the flow of goods into a country. It does so through a direct restriction on the number of items that may be imported, however, as opposed to an attempt to price the goods out of the market (Colander, 2003a).

The Heckscher-Ohlin theory holds that a country will tend to export the commodities that use relatively more of...

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INTERNATIONAL TRADE SIMULATION Advantages & Disad. (1969, December 31). In Retrieved 16:22, August 15, 2020, from