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International trade

Ancient silk road trade routes across Eurasia.
Ancient silk road trade routes across Eurasia.
International trade is the exchange of capital, goods, and services across international borders or territories.[1] In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries.

Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.

International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.

Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and less extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production.

Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country.[2]

International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.



Roman trade with India according to the Periplus Maris Erythraei, 1st century CE.

The history of international trade chronicles notable events that have affected the trade between various countries.

In the era before the rise of the nation state, the term 'international' trade cannot be literally applied, but simply means trade over long distances; the sort of movement in goods which would represent international trade in the modern world.


There have been several models for international trade.

Adam Smith's model

Adam Smith displays trade taking place on the basis of countries exercising absolute cost advantage over one another.

Ricardian model

The law of comparative advantage was first proposed by David Ricardo. The Ricardian model focuses on comparative advantage, which arises due to differences in technology or natural resources. The Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

The Ricardian model makes the following assumptions:

  1. Labor is the only primary input to production
  2. The relative ratios of labor at which the production of one good can be traded off for another differ between countries

Heckscher-Ohlin model

In the early 1900s a theory of international trade was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory has subsequently been known as the Heckscher-Ohlin model (H-O model). The results of the H-O model are that 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.

In the Heckscher-Ohlin model the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, such as the Leontief paradox, were noted in empirical tests by Wassily Leontief who found that the United States tended to export labor-intensive goods despite having an abundance of capital.

The H-O model makes the following core assumptions:

  1. Labor and capital flow freely between sectors
  2. The amount of labor and capital in two countries differ (difference in endowments)
  3. Technology is the same among countries (a long-term assumption)
  4. Tastes are the same.

Reality and Applicability of the Heckscher-Ohlin Model

In 1953, Wassily Leontief published a study in which he tested the validity of the Heckscher-Ohlin theory.[3] The study showed that the U.S was more abundant in capital compared to other countries, therefore the U.S would export capital-intensive goods and import labor-intensive goods. Leontief found out that the U.S's exports were less capital intensive than its imports.

After the appearance of Leontief's paradox, many researchers tried to save the Heckscher-Ohlin theory, either by new methods of measurement, or either by new interpretations. Leamer[4] emphasized that Leontief did not interpret H-O theory properly and claimed that with a right interpretation, the paradox did not occur. Brecher and Choudri[5] found that, if Leamer was right, the American workers' consumption per head should be lower than the workers' world average consumption.[6][7] Many textbook writers, including Krugman and Obstfeld and Bowen, Hollander and Viane, are negative about the validity of H-O model.[8][9] After examining the long history of empirical research, Bowen, Hollander and Viane concluded: "Recent tests of the factor abundance theory [H-O theory and its developed form into many-commodity and many-factor case] that directly examine the H-O-V equations also indicate the rejection of the theory."[9]

Specific factors model

In the specific factors model, labor mobility among industries is possible while capital is assumed to be immobile in the short run. Thus, this model can be interpreted as a short-run version of the Heckscher-Ohlin model. The "specific factors" name refers to the assumption that in the short run, specific factors of production such as physical capital are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms.

Additionally, owners of opposing specific factors of production (i.e., labor and capital) are likely to have opposing agendas when lobbying for controls over immigration of labor. Conversely, 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.

New Trade Theory

New Trade Theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (i.e. foreign direct investment) that exists. New Trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale. One result of these theories is the home-market effect, which asserts that, 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.

Although new trade theory can explain the growing trend of trade volumes of intermediate goods, Krugman's explanation depends too much on the strict assumption that all firms are symmetrical, meaning that they all have the same production coefficients. Shiozawa, based on much more general model, succeeded in giving a new explanation on why the traded volume increases for intermediates goods when the transport cost decreases [10].

Gravity model

The Gravity model of trade presents a more empirical analysis of trading patterns. The gravity model, in its basic form, predicts 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.

Ricardian theory of international trade (modern development)

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 common representation of this model is made using an Edgeworth Box.

This model has been expanded to many-country and many-commodity cases. Major general results were obtained by McKenzie[11] and Jones,[12] including his famous formula. It is a theorem about the possible trade pattern for N-country N-commodity cases.

Contemporary theories

Ricardo's idea was even expanded to the case of continuum of goods by Dornbusch, Fischer, and Samuelson[13] This formulation is employed for example by Matsuyama[14] and others. These theories use a special property that is applicable only for the two-country case.

Neo-Ricardian trade theory

Inspired by Piero Sraffa, a new strand of trade theory emerged and was named neo-Ricardian trade theory. The main contributors include Ian Steedman (1941-) and Stanley Metcalfe (1946-). They have criticized neoclassical international trade theory, namely the Heckscher-Ohlin 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).[15] This was a second round of the Cambridge capital controversy, this time in the field of international trade.[16]

The merit of neo-Ricardian trade theory is that input goods are explicitly included. This is in accordance with Sraffa's idea that any commodity is a product made by means of commodities. The limitation of their theory is that the analysis is restricted to small-country cases.

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. Yeats[17] found that 30% of world trade in manufacturing involves intermediate inputs. Bardhan and Jafee[18] found that intermediate inputs occupy 37 to 38% of U.S. imports for the years 1992 and 1997, whereas the percentage of intrafirm trade grew from 43% in 1992 to 52% in 1997.

McKenzie[19] and Jones[20] emphasized the necessity to expand the Ricardian theory to the cases of traded inputs. In a famous comment McKenzie (1954, p. 179) 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."[21] Paul Samuelson[22] coined a term Sraffa bonus to name the gains from trade of inputs.

Ricardo-Sraffa trade theory

John Chipman observed in his survey that McKenzie stumbled upon the questions of intermediate products and discovered that "introduction of trade in intermediate product necessitates a fundamental alteration in classical analysis."[23] It took many years until Y. Shiozawa[24] succeeded in removing this deficiency. 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. This new theory is called Ricardo-Sraffa trade theory.

Largest countries by total international trade

Volume of world merchandise exports

Rank Country Total International Trade
(Billions of USD)
Date of
- World 27,567.0 2010 est.
- (Extra-EU27) 4,475.0 2011 est.[25]
1 3,825.0 2011 est.
2 3,561.0 2011 est.
3 2,882.0 2011 est.
4 1,595.5 2011 est.
5 1,263.0 2011 est.
6 1,150.3 2011 est.
7 1,091.0 2011 est.
8 1,084.0 2011 est.
9 1,050.1 2011 est.
- 944.8 2011 est.
10 910.2 2011 est.
11 818.8 2011 est.
12 808.7 2011 est.
13 792.3 2011 est.
14 715.2 2011 est.
15 678.2 2011 est.
16 664.4 2011 est.
17 623.7 2011 est.
18 607.9 2011 est.
19 502.3 2011 est.
20 470.4 2011 est.

Source : Exports. Imports. The World Factbook.

Top traded commodities (exports)

Rank Commodity Value in US$('000) Date of
1 Mineral fuels, oils, distillation products, etc. $2,183,079,941 2010
2 Electrical, electronic equipment $1,833,534,414 2010
3 Machinery, nuclear reactors, boilers, etc. $1,763,371,813 2010
4 Vehicles other than railway, tramway $1,076,830,856 2010
5 Plastics and articles thereof $470,226,676 2010
6 Optical, photo, technical, medical, etc. apparatus $465,101,524 2010
7 Pharmaceutical products $443,596,577 2010
8 Iron and steel $379,113,147 2010
9 Organic chemicals $377,462,088 2010
10 Pearls, precious stones, metals, coins, etc. $348,155,369 2010

Source: International Trade Centre[26]

See also




External links


Official statistics

Data on the value of exports and imports and their quantities often broken down by detailed lists of products are available in statistical collections on international trade published by the statistical services of intergovernmental and supranational organisations and national statistical institutes:

The definitions and methdological concepts applied for the various statistical collections on international trade often differ in terms of definition (e.g. special trade vs. general trade) and coverage (reporting thresholds, inclusion of trade in services, estimates for smuggled goods and cross-border provision of illegal services). Metadata providing information on definitions and methods are often published along with the data.

Other data sources

Other external links

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