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Refinements In International Trade Theory

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1. Refinements in International trade Theory
Many economists believe that international trade promotes economic growth and development and thereby economic welfare of people. However, some economists are not unanimous in this issue for instance Haberler, Cairncross and Robertson hold the new that foreign trade leads to economic growth and development. Myrdal, Prebisch and Singer hold the view that the benefits of international trade are largely biased to developed countries. Hence it is imperative to briefly discuss different theories on International trade. We discuss the classical theory and then the refinements on classical theory and other theories in the following.
a. Classical Theory of International Trade
According to classical theory …show more content…

If the transfer cost is also taken into account the international division of labor will considerably reduce. If transfer cost of a commodity is higher than the difference in the costs of production. Trade is not possible between two countries because there is no comparative advantage. The theory can also be applied when more than two commodities are exchanged. If two countries are exchanging a number of commodities between them, one country may have a comparative advantage over the other in all its exports. The theory is also applicable when more than two countries arc involved in the trade. Under this situation each country will specialize in that product in which it enjoys a comparative advantage over the others. Ricardian theory is based on the assumption of constant prices. But if variable costs are also taken into account, the substance and spirit of the theory are not eroded. Production under increasing cost condition will certainly reduce the chance for international specialization. The mere existence of "non-competing" groups does not influence the theory so long as the relative wages in each country are same. Taussig (1941) points out that a country can reap comparative advantage for those goods which are produced with much capital but with low interest …show more content…

Haberler in 1936 tried to improve theory in terms of opportunity costs. According to opportunity cost theory, the cost of a commodity is the amount of the second best commodity that must be given up to get one additional unit of the first commodity. There is no assumption that labor is the only factor of production. This theory appears to be an improvement of the classical theory as it recognizes the existence of various factors of production other than

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