The New Trade Theory (H-O Model?

INTRODUCTION:

Trade contributes a significant share of GDP. Its economic, social and political importance has been increasing over time and now trade is strength of every nation. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing all are having a major impact on country’s trade. Different school of thought present the importance and significance of trade in there theories with the passage of time. During the 18th and 19th century Mercantilists’ maintained that the way a nation to become rich and powerful was to export more than its import because they believed that nation could gain in trade only at the expense of other nations (i.e. trade was a zero sum game, and exports are greater than

The Heckscher-Ohlin model (H-O Model) states that a country should specialize in production and export using the factors that are most abundant, and thus the cheapest or the country should export that product whose production required nation’s abundant factor intensively. Now, New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing returns to scale and the network effect that leads to higher productivity and

These policies like import substitution, devaluation of rupee in 1972, export finance scheme, tax concession, export duties relaxation, export subsidies, export refinancing, delinking of the rupee from the US$ have helped in boosting its exports to some extent but not enough to stabilize its export earnings . On the other side, imports have exceeded exports in almost every year since 1950, and Pakistan had a deficit on its balance of trade each year from FY 1973 through FY 1992 . During the 1980 's capital goods constituted one-third of total imports. In other words, instead of producing capital goods at home, we continue to depend upon imports for our requirements . Apart from capital goods petroleum and petroleum products, chemicals and edible oil are major terms which together form 37 per cent of total imports. It is sad to note that although Pakistan is an agricultural country but continues to import edible oil, wheat and tea which together constitute 12 percent of import bill . Little effort has so far been made to achieve autarky in these commodities. The foreign trade stataistics of Pakistan are depicted in Figure 1.1 that clearly shows that its imports are drastically incraesing as copmare to its