The World Financial Center Of Southeast Asian Nations

Trading is very important economic factor. Trade between different countries depends upon different factors. There are some factors due to which bilateral trade between two states is enhanced. On contrary, there are some factors which restrict or reduce the trade between two countries (Meyer, 2011). Factors which enhance trade include different cultural, political, geographic and economic aspects which are common between the 2 countries involved in bilateral trade with each other. While trade is reduced or restricted, if two countries are completely different culturally, politically, geographically and economically (Siegel, 2011). For example, trade between two countries, having common boarder, currency, per capita income et cetera, will be lot more high than those countries which do not share these factors common with each

However, it was apparent to economists that nations with similar resource endowments exchanged similar products with each other. Economists felt that trade explained solely by comparative advantage was an incomplete analysis of international trade. Furthermore, since the classical trade theory was unable to explain intraindustry trade, economists decided to expand on the classical trade theory by creating a new theory of trade (Carbaugh, 2011). The new theory states that economies of scale provide incentive for a country to specialize in a particular product (Carbaugh, 2011). Furthermore, based on economies of scale, nations with similar factor endowments will trade with each other as sometimes it is beneficial (Carbaugh, 2011). Arguments stemming from this new trade theory puts the economic case for free trade in doubt.

International trade theory provides explanations for the pattern of international trade and the distribution of the gains from trade. The study of trade emerged in the era of mercantilism (approximately in 16th century) as a crude set of arguments about how a nation should trade. The theory of International Trade examines the reasons why different countries exchange their products, but in addition the aftermath that this process has, in the internal economy of a country involved in international trade. Adam Smith, in The Wealth of Nations in 1776, postulated that under free trade, each nation should specialize in producing those goods that it could produce most efficiently. Some of these would be exported to pay for the imports of goods that could be produced more efficiently elsewhere. Smith ridiculed the fear of trade by comparing nations to households. Since every household finds it worthwhile to produce only some of its needs and to buy others with products it can sell, the same should apply to nations. The theory of absolute advantage is based on the assumption that the nation is absolutely better (i.e., more efficient) at production of

Trade-offs play a significant role in every economic agreement. It is impossible for each nation to produce a sufficient amount of each good necessary to maintain its population, making trade an integral part of societal function. In theory, specialization leads to

International trade has become a very important means of survival for global economies in this day and age. As countries continue to grow and resources become smaller, trade with other countries who have provide certain resources in a greater capacity becomes very lucrative. At the same time, those same countries must be able to offer something of similar value. Through this ability of trade, this allows countries to

1. Do the results of empirical testing support the Heckscher-Ohlin, Factor Proportions Theories of trade?

Economic analysts say trading among other countries with no stipulations improve global efficiency in resource allocation (Tupy, 2005). Free Trade delivers goods and services to those who value them most and allows partners to gain from specializing in the producing those goods and services they do best; according to Tupy’s findings, Economists call that the law of comparative advantage. Tupy also states when producers create goods they are comparatively skilled at i.e. Germans producing beer and the French producing wine, those goods increase in abundance and quality. Trade allows consumers to benefit from more efficient production methods, for example, without large markets for goods and services, large production runs would not be economical. Large production runs, in turn, are instrumental to reducing product costs while lower production

(Krugman 1987,131) Free trade supporters make a point that if we don’t move toward liberalization, the gravity of protectionism and political interests will pull us back-“bicycle theory”. (Bergsten 1996, 109). The successful example of bicycle moving forward is the Uruguay Round conclusion. (Bergsten 1996, 109). Following that NAFTA and such, have made a significant progress in resolving debate in the international trade arena. Liberalist economists insist that with openness toward international trade, countries benefit in multiple segments and knowledge is one of the major exchanges which are crucial for improvement. ( O’Brien & Williams 2013,112) Therefore, it is important to understand liberalist perspective at first. Economic liberalist view human nature acting rational in order to maximize their self-interest. This theory strongly support the thought where individuals when acting rationally create markets which produce, distribute and consume goods function best free. This way international wealth is maximized with exchange of goods and services which is also a comparative advantage based theoretical aspect. (Mingst &Toft, 2104, 310) With Ricardo’s comparative advantage, it’s important to mention specialization of a commodity that a specific country can produce more efficiently in exchange for another commodity.

Smith’s original theory on international trade follows the concept of division of labor at the local level and supports free international trade to maximize production and benefits for all. His view is that division of labor is related to production, where an advanced division of labor is directly related to increased and cost-effective production (Schumacher, 2012). As a result, it is possible to produce

From his description, it follows that countries can benefit from trading as long as one of the countries involved is better at producing one thing than another.

The classical model also known as the Ricardian model argued that countries trade because of differences in their technology however, the Heckscher-Ohlin (HO) is a factor-proportions theory of comparative advantage idea which argues that the idea of comparative advantage works under the influence of relative factor abundance and relative factor insensitivity (Suranovic, 2006).

The new trade theory began to emerge in the 1970s when a number of economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade (Wickramasekera, Cronk & Hill 2013). This theory is based on two major concepts that are economies of scale and first-mover advantage. To elaborate:

“Since World war II, development has been the most important term used to describe economic, social and political changes in what have come to be known as Third world countries” (Zhang, 2003).

Another theory, which explains the gains from trade, is specific-factors model. It is similar to the Ricardian Model, but it is more complicated since it takes into account two more factors of production: land and capital. This model assumes there is two-country world, in which only two goods are traded. It is assumed that labour and capital are used in the manufacturing industry. Moreover, labour and land are used in the agricultural industry. Specific-factors model is short run model, because the factors of production cannot shift from one industry to another. In each industry, there is diminishing return to labour.

There is a reason countries trade, countries cannot achieve total economic self-sufficiency, most countries need goods and services that other countries have. As a result, countries must trade to get all the goods and services they need. Trade is the exchange of an item for another, nowadays we trade by exchanging money for items. Countries have different distributions of resources, and countries have comparative advantages in the production of certain goods and services, therefore they specialize in the production of that good or service. For example, Canada has to trade with Ecuador or Brazil for coffee beans because of the different climates it’s much easier for countries with a temperate climate to grow coffee beans, therefore Canada exchanges money or other goods or services for the coffee beans. Another scenario is the different allocation of resources such as China and Saudi Arabia, Saudi Arabia has a comparative advantage in the production of oil, so it would be more efficient for China to buy their oil off Saudi Arabia in exchange for money or goods and services. Countries can also specialize in labor intensive industries, for example India have relatively cheap labor, thus other countries open plants in India to make use of the cheap labor. Such as Coca-Cola, an American company opened plants in India to exploit the cheap labor. Even if a country has an absolute advantage in all products it would still gain from trading because if they specialize they’d be more