International Trade

The Silk Road

International trade is the exchange of capital, goods, and services across international borders or territories, which could involve the activities of the government and individual. It represents a significant share of gross domestic product (GDP) and has been present throughout history (e.g. The Silk Road).



Trading globally gives consumers and countries the opportunity to be exposed to new markets and products. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments.


International Trade Models:
 
1. Adam Smith’s Model
Adam Smith displays trade taking place on the basis of countries exercising absolute advantage over one another.

2. Ricardian Model
The Ricardian model focuses on comparative advantage, which arises due to differences in technology or natural resources. It is based on the following assumptions:
a. Labor is the only primary input to production
b. The relative ratios of labor at which the production of one good can be traded off for another differ between countries and governments.

3. Heckscher Ohlin Model (H-O Model)
In this theory, countries will produce and export goods that require resources (factors) which are relatively abundant and import goods that require resources which are in relative short supply. It makes the following core assumptions:
a. Labor and capital flow freely between sectors
b. The amount of labor and capital in two countries differ (difference in endowments)
c. Technology is the same among countries (a long-term assumption)
d. Tastes are the same
In the specific factors model, labor mobility among industries is possible while capital is assumed to be immobile in the short run. Both owners of capital and labor, profit in real terms from an increase in the capital endowment. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade.

4. New Trade Theory
New Trade Theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with. It is often based on assumptions such as monopolistic competition and increasing returns to scale. If an industry tends to cluster in one location because of returns to scale and if that industry faces high transportation costs, the industry will be located in the country with most of its demand, in order to minimize cost (home-market effect).

5. Gravity Model
The Gravity model of trade presents a more empirical analysis of trading patterns. It predict trade based on the distance between countries and the interaction of the countries’ economic sizes. The model mimics the Newtonian law of gravity which also considers distance and physical size between two objects. The model has been proven to be empirically strong through econometric analysis.

6. Ricardian Theory
The Ricardian theory of comparative advantage became a basic constituent of neoclassical trade theory. Any undergraduate course in trade theory includes a presentation of Ricardo's example of a two-commodity, two-country model.
a. Contemporary theories
Ricardo's idea was expanded to the case of continuum of goods by Dornbusch, Fischer, and Samuelson. These theories use a special property that is applicable only for the two-country case.
b. Neo-Ricardian trade theory
It criticized neoclassical theory (H-O Model), on the basis that the notion of capital as primary factor has no method of measuring it before the determination of profit rate (thus trapped in a logical vicious circle). The merit of Neo-Ricardian trade theory is that input goods are explicitly included and restricted to small-country cases.
c. Traded intermediate goods
Ricardian trade theory ordinarily assumes that the labor is the unique input. This is a great deficiency as trade theory, for intermediate goods occupy the major part of the world international trade. McKenzie and Jones emphasized the necessity to expand the Ricardian theory to the cases of traded inputs. McKenzie pointed that "A moment's consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England."
d. Ricardo-Sraffa trade theory
Economist John S. Chipman postulated that "introduction of trade in intermediate product necessitates a fundamental alteration in classical analysis". The Ricardian trade theory was now constructed in a form to include intermediate input trade for the most general case of many countries and many goods. Chipman called this the Ricardo-Sraffa trade theory.
e. International production fragmentation trade theory
Cheng used Li & Fung Ltd as a case study in the international production fragmentation trade theory through which producers in different countries are allocated a specialized slice or segment of the value chain of the global production. Allocations are determined based on "technical feasibility" and the ability to keep the lowest final price possible for each product.

7. Free-Trade Theories
Many countries following mercantilist policy tried to become as self-sufficient as possible. They supporting free trade: absolute advantage and comparative advantage. Both theories hold that nations should neither artificially limit imports nor promote exports. The market will determine which producers survive as consumers buy those products that best serve their needs.


Countries and Commodities by International Trade

No.	Country	Trade of Goods	% GDP
		(Billions of USD)
1	China	4,201.00	40.50%
2	United States	3,944.00	22.60%
3	Germany	2,866.00	74.30%
4	Japan	1,522.40	33.00%
5	France	1,212.30	42.60%
6	United Kingdom	1,189.40	40.40%
7	South Korea	1,170.90	82.60%
8	Hong Kong	1,088.40	375.80%
9	Netherlands	1,041.60	120.20%
10	Italy	948.6	44.20%
11	Canada	947.2	51.10%
12	India	850.6	41.50%
13	Russia	844.2	41.30%
14	Singapore	824.6	262.80%
15	Mexico	813.5	61.20%
16	Switzerland	721.8	101.40%
17	United Arab Emirates	676.4	156.70%
18	Belgium	663.6	181.10%
19	Spain	655.2	48.20%
20	Taiwan	595.5	112.50%
List of countries by International Trade of 2014

Rank	Commodity	Value
1	Mineral fuels, oils, distillation products, etc.	$2,183,079,941
2	Electrical, electronic equipment	$1,833,534,414
3	Machinery, nuclear reactors, boilers, etc.	$1,763,371,813
4	Vehicles other than railway	$1,076,830,856
5	Plastics and articles thereof	$470,226,676
6	Optical, photo, technical, medical, etc. apparatus	$465,101,524
7	Pharmaceutical products	$443,596,577
8	Iron and steel	$379,113,147
9	Organic chemicals	$377,462,088
10	Pearls, precious stones, metals, coins, etc.	$348,155,369
Top traded exports commodities of 2012

Source: https://en.wikipedia.org/wiki/International_trade