International trade is the exchange of goods and services across different countries. International trade theory has helped to understand the pattern of trade that prevails between the countries. It may be explained with the help of several economic models as under:
Ricardian Model of International Trade
Ricardo had propounded the comparative advantage theory of international trade. According to this theory countries would specialise in the production of commodities which they can produce at a comparatively cheaper rate. Exchange of goods between two countries would be based on this principle of comparative advantage, each exchanging goods that they produce the best.
The ratio of labour to capital in a particular country does not enter into the theory of comparative advantage.
Heckscher-Ohlin formulated the international trade theory as an alternative to the theory of comparative advantage as propounded by Ricardo. According to this model the trade pattern is governed by the difference in the ratio of labour to capital between the two countries.
The country abundant in a particular factor of production would intensively use it to produce a particular good. The good will then be exported to countries which has the alternative factor abundance. Similarly goods would be imported from countries that have the alternative factor abundance. This is how trade relations would be set between these countries. The Leontief Paradox invalidated the model proposed by Heckscher-Ohlin. It was seen that the United States exported labour intensive products even when it was a capital abundant country.
According to the gravity model trade between countries would be governed by the distance between countries and the size of the economy of the trading countries. Econometric analysis shows that the model was full proof on empirical grounds.
Model of Specific Factors
According to this model labour is mobile across different industries. The case is not the same for capital. Capital is mobile only in the long run. This model is appropriate for understanding the distribution of income but it is difficult to infer the trade pattern .
Last Updated on : 18th July 2013