Editing Internationalization (section)

== Trade theories ==

=== Absolute cost advantage <small>''(Adam Smith, 1776)''</small> ===
{{Main|Absolute advantage}}
[[Adam Smith]] claimed that a country should specialise in, and export, commodities in which it had an absolute advantage.<ref name="ingham">{{cite book |title= International economics: a European focus |last= Ingham |first= Barbara |year= 2004 |publisher= Pearson Education |isbn= 0-273-65507-8 |pages= 336 |url= https://books.google.com/books?id=zIaS9R7HUGIC }}</ref> An absolute advantage existed when the country could produce a commodity with less costs per unit produced than could its trading partner.<ref name="ingham" /> By the same reasoning, it should import commodities in which it had an absolute disadvantage.<ref name="ingham" />

While there are possible [[gains from trade]] with absolute advantage, comparative advantage extends the range of possible mutually beneficial exchanges. In other words, it is not necessary to have an absolute advantage to gain from trade, only a comparative advantage.

=== Comparative cost advantage <small>''(David Ricardo, 1817)''</small> ===
{{Main|Comparative advantage|Ricardian economics}}
[[David Ricardo]] argued that a country does not need to have an absolute advantage in the production of any commodity for international trade between it and another country to be mutually beneficial.<ref name="hunt">{{cite book |title= History of economic thought: A critical perspective |last= Hunt |first= E. K. |year= 2002 |publisher= M.E. Sharpe |isbn= 0-7656-0607-0 |page= 120 |url= https://books.google.com/books?id=_qHKFNwhahoC}}</ref> Absolute advantage meant greater efficiency in production, or the use of less labor factor in production.<ref name="hunt" /> Two countries could both benefit from trade if each had a relative advantage in production.<ref name="hunt" /> Relative advantage simply meant that the ratio of the labor embodied in the two commodities differed between two countries, such that each country would have at least one commodity where the relative amount of labor embodied would be less than that of the other country.<ref name="hunt" />

=== Gravity model of trade <small>''(Walter Isard, 1954)''</small> ===
{{Main|Gravity model of trade|Walter Isard}}
The gravity model of trade in [[international economics]], similar to other [[gravity model]]s in [[social science]], predicts bilateral trade flows based on the economic sizes of (often using [[GDP]] measurements) and distance between two units. The basic theoretical model for trade between two countries takes the form of:

:<math>F_{ij} = G \frac{M_i M_j}{D_{ij}}</math>

with:

:<math>F \,</math>: '''Trade flow'''

:<math>i, j \,</math>: '''Country i and j'''

:<math>M \,</math>: '''Economic mass''', for example GDP

:<math>D \,</math>: '''Distance'''

:<math>G \,</math>: '''Constant'''

The model has also been used in [[international relations]] to evaluate the impact of treaties and alliances on trade, and it has been used to test the effectiveness of trade agreements and organizations such as the [[North American Free Trade Agreement]] (NAFTA) and the [[World Trade Organization]] (WTO).

=== Heckscher–Ohlin model <small>''(Eli Heckscher, 1966 & Bertil Ohlin, 1952)''</small> ===
{{Main|Heckscher–Ohlin model|Eli Heckscher|Bertil Ohlin}}
The Heckscher–Ohlin model (H–O model), also known as the ''factors proportions development'', is a [[general equilibrium]] mathematical model of [[International economics|international trade]], developed by [[Eli Heckscher]] and [[Bertil Ohlin]] at the [[Stockholm School of Economics]]. It builds on [[David Ricardo]]'s theory of [[comparative advantage]] by predicting patterns of commerce and production based on the [[Factors of production|factor]] endowments of a trading region. The model essentially says that countries will export products that utilize their abundant and cheap {{Not a typo|factor(s)}} of production and import products that utilize the countries' scarce {{Not a typo|factor(s)}}.<ref name="blaug">{{cite book |title= The methodology of economics, or, How economists explain |last= Blaug |first= Mark |year= 1992 |publisher= Cambridge University Press |isbn= 0-521-43678-8 |page= 190 |url= https://books.google.com/books?id=T4y7HyduGnIC}}</ref>

The results of this work have been the formulation of certain named conclusions arising from the assumptions inherent in the model. These are known as:

* [[Heckscher–Ohlin theorem]]
* [[Rybczynski theorem]]
* [[Stolper–Samuelson theorem]]
* [[Factor price equalization|Factor-Price Equalization theorem]]

=== Leontief paradox <small>''(Wassily Leontief, 1954)''</small> ===
{{Main|Leontief paradox}}
[[Wassily Leontief]]'s paradox in [[economics]] is that the country with the world's highest [[Capital (economics)|capital]]-per worker has a ''lower'' [[Capital intensive|capital:labour ratio]] in [[exports]] than in imports.

This [[econometric]] find was the result of Professor [[Wassily W. Leontief]]'s attempt to test the [[Heckscher-Ohlin theorem|Heckscher-Ohlin theory]] empirically. In 1954, Leontief found that the [[United States|U.S.]] (the most [[Factor endowment|capital-abundant]] country in the world by any criteria) exported [[Labour (economics)|labor]]-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory.

=== Linder hypothesis <small>''(Staffan Burenstam Linder, 1961)''</small> ===
{{Main|Linder hypothesis|Staffan Burenstam Linder}}
The Linder hypothesis (demand-structure hypothesis) is a [[conjecture]] in economics about [[international trade]] patterns. The hypothesis is that the more similar are the demand structures of countries the more they will trade with one another. Further, international trade will still occur between two countries having identical [[preferences]] and [[factor endowment]]s (relying on specialization to create a [[comparative advantage]] in the production of [[Product differentiation|differentiated]] goods between the two nations).

=== Location theory ===
{{Main|Location theory}}
Location theory is concerned with the geographic location of economic activity; it has become an integral part of [[economic geography]], [[regional science]], and spatial economics. Location theory addresses the questions of what economic activities are located where and why. Location theory rests &mdash; like [[microeconomics|microeconomic theory]] generally &mdash; on the assumption that agents act in their own self-interest. Thus firms choose locations that maximize their profits and individuals choose locations, that maximize their utility.

=== Market imperfection theory <small>''(Stephen Hymer, 1976 & Charles P. Kindleberger, 1969 & Richard E. Caves, 1971)''</small> ===
{{Main|Market failure|Stephen Hymer|Charles P. Kindleberger|Richard E. Caves}}
In economics, a market failure is a situation wherein the allocation of [[Production (economics)|production]] or use of [[goods and services]] by the [[free market]] is not [[Efficiency (economics)|efficient]]. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that can be improved upon from the societal point of view.<ref name="krugman">Krugman, Paul, Wells, Robin, ''Economics'', Worth Publishers, New York, (2006)</ref> The first known use of the term by economists was in 1958,<ref name="Bator">{{cite journal |last= Bator |first= Francis M. |title= The Anatomy of Market Failure |journal= The Quarterly Journal of Economics |volume= 72 |date=August 1958 |pages= 351–379 |doi= 10.2307/1882231 |jstor= 1882231 |issue= 3 |publisher= The MIT Press}}</ref> but the concept has been traced back to the Victorian philosopher [[Henry Sidgwick]].<ref name="Medema">{{cite web |url= http://www.utilitarian.net/sidgwick/about/2004070102.pdf |title= Mill, Sidgwick, and the Evolution of the Theory of Market Failure |access-date= 2007-06-23 |last= Medema |first= Steven G. |date= July 2004 |archive-date= 2007-09-27 |archive-url= https://web.archive.org/web/20070927021943/http://www.utilitarian.net/sidgwick/about/2004070102.pdf |url-status= dead }}</ref>

Market imperfection can be defined as anything that interferes with trade.<ref name="degennaro">{{cite web |url= http://www.frbatlanta.org/filelegacydocs/wp0512.pdf |title= Market Imperfections |access-date= 2009-03-17 |last= DeGennaro |first= Ramon P. |date= December 2005 |work= Working Paper |publisher= Federal Reserve Bank of Atlanta - Working Paper Series |archive-url= https://web.archive.org/web/20100401014940/http://www.frbatlanta.org/filelegacydocs/wp0512.pdf |archive-date= 2010-04-01 |url-status= dead }}</ref> This includes two dimensions of imperfections.<ref name="degennaro" /> First, imperfections cause a rational market participant to deviate from holding the market portfolio.<ref name="degennaro" /> Second, imperfections cause a rational market participant to deviate from his preferred risk level.<ref name="degennaro" /> Market imperfections generate costs which interfere with trades that rational individuals make (or would make in the absence of the imperfection).<ref name="degennaro" />

The idea that [[multinational corporation]]s (MNEs) owe their existence to market imperfections was first put forward by [[Stephen Hymer]], [[Charles P. Kindleberger]] and Caves.<ref name="pitelis1">{{cite book |others= [[Stephen Hymer|Hymer]] (1960, published in 1976), [[Charles P. Kindleberger|Kindleberger]] (1969) & Caves (1971) |title= The nature of the transnational firm |last= Pitelis |first= Christos |author2=Roger Sugden |year= 2000 |publisher= Routledge |isbn= 0-415-16787-6 |page= 74 |url= https://books.google.com/books?id=mXjeiQYR088C}}</ref> The market imperfections they had in mind were, however, ''structural'' imperfections in markets for final products.<ref name="pitelis" />

According to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentiation,<ref name="pitelis4">{{cite book |others= [[Joe S. Bain|Bain]] (1956) |title= The nature of the transnational firm |last= Pitelis |first= Christos |author2=Roger Sugden |year= 2000 |publisher= Routledge |isbn= 0-415-16787-6 |page= 74 |url= https://books.google.com/books?id=mXjeiQYR088C}}</ref> but in their absence markets are perfectly efficient.<ref name="pitelis">{{cite book |title= The nature of the transnational firm |last= Pitelis |first= Christos |author2=Roger Sugden |year= 2000 |publisher= Routledge |isbn= 0-415-16787-6 |pages= 224 |url= https://books.google.com/books?id=mXjeiQYR088C}}</ref>

By contrast, the insight of transaction costs theories of the MNEs, simultaneously and independently developed in the 1970s by McManus (1972), Buckley and Casson (1976), Brown (1976) and Hennart (1977, 1982), is that ''market imperfections'' are inherent attributes of markets, and MNEs are institutions to bypass these imperfections.<ref name="pitelis" /> Markets experience natural imperfections, i.e. imperfections that are because the implicit neoclassical assumptions of perfect knowledge and perfect enforcement are not realized.<ref name="pitelis5">{{cite book |others= [[John Harry Dunning|Dunning]] & Rugman (1985), Teece (1981) |title= The nature of the transnational firm |last= Pitelis |first= Christos |author2=Roger Sugden |year= 2000 |publisher= Routledge |isbn= 0-415-16787-6 |page= 74 |url= https://books.google.com/books?id=mXjeiQYR088C}}</ref>

=== New Trade Theory ===
{{Main|New Trade Theory}}
New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing [[returns to scale]] and the [[network effect]]. Some economists have asked whether it might be effective for a nation to shelter infant industries until they had grown to a sufficient size large enough to compete internationally.

New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market (via a network effect).

=== Specific factors model ===
{{Main|International trade#Specific factors model}}
In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. Thus, this model can be interpreted as a 'short run' version of the [[Heckscher-Ohlin model]].