The WTO: Economic Underpinnings

Running head : THEORY OF INTERNATIONAL TRADE

Theory of International Trade

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Abstract

International trade theory is based on comparative and specialization theory . The gains accruing from international trade are incentives to international trade . The Ricardo theory and Heckscher-Ohlin model explains the theory surrounding the international theory . This discusses on this theory and free trade concept

Trade cross bs of certain country may be accompanied by gains to the countries involved . Various theories have been put forward to explain the international trade , the

gains , its effect on income distribution , and trade policies employed in international trade . These theories includes the Ricardo theory and Hecscher-Ohlin model

Heckscher-Ohlin model

The Heckscher-Ohlin is based on specialization from differences in endowment of resources . The theory is based on the assumption that

Different countries are differently endowed with resources . The theory assumes two factors and two commodities . This assumption is meant to simplify the model in explaining the international trade . In real situation , international trade is usually between more than two countries , factors of production are more than two and commodities traded are more than two

The two factors are capital and labor . Assumes two commodities X and Y Y is capital intensive while X is labor intensive . This means that the theory assumes that , Y requires relatively more capital to produce in countries A and B . This is to say , the capital labor ratio (k /l ) is higher for production of commodity Y as compared to commodity X in country...