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New Trade Theory Essay

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This essay seeks to offer a critical discussion regarding the usefulness of the ‘New’ New Trade Theory(NNTT) .Theories of trade have greatly evolved over centuries. From Ricardo’s (1817) doctrine of comparative advantage to the refined neoclassical perfect competition. From Krugman’s (1987) New Trade Theory to Melitz (2003) New New Trade Theory. The evolution of one theory did not mean the complete erosion of another. It will be shown in this essay that a new theory is often a build-up or contradiction of the preceding one. It must be emphasised from the outset that all these theories share a common view that trade is beneficial to growth and consequential development. However this essay seeks to answer the question of what relevance is the …show more content…

Specifically, firms are not homogenous. They differ in size, nature of business and levels of productivity. In other words firms not only vary across industries but also within industries. It is this heterogeneous nature of firms that offers different trade outcomes (Melitz 2003). Thus, the NNTT offers a new angle for policy prescription which previous theories that looked at firm homogeneity did not. The NNTT is more realistic in this manner as it brings to light the problem associated with generalisation because firms are at different levels of production, produce different goods and use diverse modes of production. So treating countries homogenously when deriving trade policy is a …show more content…

While the New Trade Theory still has tenets of comparative advantage, (typically what is pursued by most developing countries), the NNTT leads to diversification. This will happen because existing firms that are trading internationally will devise different products to gain a further grip on the markets abroad (Ciuriak et al 2011:6). Therefore, this, means a policy shift from focusing on primary products to more sophisticated and highly industrialized ones which offer greater gains in the long run. For instance, developing countries like Zambia can make a shift from processing copper as a raw material to exporting copper rods. Therefore, this theory stresses value addition as a sure way of deriving more gains from international trade. The NNTT shows that firms will be compelled to be more productive because they are well aware of the

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