Playlist on International Trade Finance (15 videos already uploaded).
Link to the playlist in the description box and at the end of the video.
Focus of today's video: Theories of Trade Finance.
Theories Covered
Theory of Absolute Advantage
Theory of Comparative Advantage
Heckscher-Ohlin Theory
Factor Price Equalization Theory
Theory of Absolute Advantage
Economist: Adam Smith
Focus: Benefit of specialization and trade
Key Concept: Countries benefit by specializing in products they can produce most efficiently and trading for goods they are less efficient at producing.
Assumptions & Limitations:
Based on 2-country/2-product model.
Does not account for exact trade values or modern economic complexities.
Example:
Brazil specializes in coffee, India in pulses.
Brazil should produce and export coffee to India and import pulses from India.
Focus on reducing production costs and taking advantage of specialization.
Theory of Comparative Advantage
Economist: David Ricardo
Focus: Even if a country doesn't have an absolute advantage in producing any goods, it can still benefit from trade based on comparative advantage.
Key Concept: Ability to produce goods at a lower opportunity cost compared to other countries.
Assumptions & Limitations:
Based on opportunity cost and delegation of work according to efficiency.
Same 2-country model, assumes perfect competition.
Example:
Michael Jordan: good at basketball and typing.
Chooses basketball (higher income) and delegates typing.
Brazil could produce both coffee and pulses but focuses on coffee and trades for pulses with India.
Heckscher-Ohlin Theory (Factor Proportions Theory)
Economists: Eli Heckscher and Bertil Ohlin
Focus: Countries will export goods that use their abundant factors of production more intensively.
Key Concept: Comparative production edge based on factor abundance (labor, capital, etc.).
Assumptions & Limitations:
Assumes differences in factors of production create trade benefits.
Restricted to the model assumptions.
Example:
Korea (labor-intensive) vs. USA (capital-intensive).
Korea should produce labor-intensive goods, USA should produce capital-intensive goods, and trade with each other.
Factor Price Equalization Theory
Focus: Over time, free trade will equalize the price of traded products and factors of production (labor, land, capital) among countries.
Key Concept: Long-term mobility of factors of production will equalize costs and diminish comparative advantages.
Example:
Labor from Korea moves to USA for better wages.
Over time, advantages based on factor abundance dissipate.
Assumptions & Limitations of International Trade Theories
Two Countries, Two Goods Model: Not reflective of the global economy.
Constant Returns to Scale: Unrealistic in practical scenarios.
Fixed Resources and Constant Technologies: Assumes no technological innovation.
Perfect Competition: Assumes no monopolies exist.
Full Employment: Assumes all resources are fully utilized.
Summary
Each theory builds on the previous one to provide a basic understanding of international trade dynamics.
Highlight various foundational concepts but come with their own set of limitations.