International trade theory
Several different models have been proposed to predict patterns of trade and to analyse the effects of trade policies such as tariffs.
Ricardian model: the Ricardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. in a Ricardian model, countries specialize in producing what they produce best. unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.
Heckscher-Ohlin model
The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. Despite its greater complexity it did not prove much more accurate in its predictions. However from a theoretical point of view it did provide an elegant solution by incorporating the neoclassical price mechanism into international trade theory.
The theory argues that the pattern of international trade is determined by differences in factorendowments. 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, known as the Leontief paradox, were exposed in empirical tests by Wassily Leontief who found that the United States tended to export labor intensive goods despite having a capital abundance.
The Negative Effects of Development through International Trade
Desirable as it may be, international trade has negatively affected the trend of development in most developing nations.
Developing countries often suffer from foreign trade and contracts through massive exploitation of their wealth and capital, as evidence by the unequal exchange.
Neo-colonial tendencies are, often perpetuated, especially through the predominant control and subjugation by the so-called colonial masters.
The desire to promote exports by the developed nations has tended to increase the production and involvement of synthetic products, to the disadvantage of developing countries.
Foreign trade, to a certain extent, has hindered high rates of development in developing nations, where specialization on the basis of comparative advantage has made poor countries poorer and rich countries richer. Countries like Britain, USA and Japan have developed through foreign trade more.
International trade may result into the collapse of the domestic industries, as the so-called "superior' and "high quality" goods out-compete the domestically produced ones.
Terms of trades will, obviously, deteriorate. This is because the rich industrial countries export manufactured goods whose prices are continuously rising, while those of poor nations are constantly falling. This has tended to widen the gap between the poor and the rich countries.
There is a high level of protectionism adopted by the rich industrialized nations. Goods from poor countries do not freely enter markets of the developed nations. This, therefore, limits the volume of exports from developing nations.
It is evident that increased earnings from exports, especially after devaluation lead to inflationary pressures. This will increase the supply of money in the economies of developing nations and hence excessive demand.
The increased existence of multi-national enterprises/agencies in poor countries e.g Pepsi Cola, Total, Agip, etc; has undoubtedly, tended to benefit their countries of origin (developed countries).
The prevalent of low earnings from exports by LDCs has made the poor nations not to benefit from foreign trade, as they (LDCs) have weak bargaining power.
International trade tends to lead to economic dependence. Consequently, countries in the developing world may not attain self reliance in a short time.
Foreign trade, without restriction may encourage dumping and consumption of cheap inferior imports.