International Trade Theories

This report discusses the importance of international trade theories in business and explores theories such as mercantilism, absolute advantage, comparative advantage, and balance of trade. It also examines the government's involvement in international business and its impacts on an international company.

Running Head: INTERNATIONAL TRADE 0
International Business
International Trade Theories
(Student Details: )
18-Feb-19

International Trade 1
Contents
International Business......................................................................................................................2
Introduction......................................................................................................................................2
Importance of International Trade Theories in Business.................................................................2
What is International Trade Theory.............................................................................................2
Mercantilism............................................................................................................................2
Absolute advantage..................................................................................................................3
Comparative advantage...........................................................................................................3
Balance of trade.......................................................................................................................3
Importance of International Trade theories for managers...........................................................4
Government’s involvement in international business and impacts on an international company
.....................................................................................................................................................5
Conclusion.......................................................................................................................................5
References........................................................................................................................................5

International Trade 2
International Business
Introduction
This report is based on the concept of international trade theory as well as its importance
for the global managers working in international business (referred as IB). In this context,
international trade theories (herein after referred as ITTs) are kind of different theories which can
explain international trade in an illustrated form (Vijayasri, 2013). As we know that trade is a
concept of trading goods and services amid two people or more than one entity. Hence, an
international trade is the concept of an exchange amid people or entities of two different nations.
In this way, this report will contain international trade theories like absolute advantage,
mercantilism, comparative advantage as well as balance of trade (Enterslice, 2017). Besides, it
will also discuss on how and why the international government gets involved in IB as well as
their impacts on an international company’s functioning (Bell, Bryman, & Harley, 2018).
Importance of International Trade Theories in Business
The importance of ITTs in IB is considerable as global trade amid different global
countries is an essential factor to raise living standards, provide employment as well as enabling
customers to leverage a broader variety of goods (Hill C. , 2008).
What is International Trade Theory
An international trade is an exchange of currency, capital, goods, as well as services
across global borders and territories. Hence, in most of the countries, trade refers to a
considerable share of gross domestic product (referred as GDP). International trading offers
consumers and global nations an opportunity to be available to novel markets as well as
products. In this way, the theories and frameworks on which our international trade is based on
are known as ITTs (Burchill, et al., 2013).
Mercantilism
This ITT is a national economic policy which is proposed to optimize the trades of any
nation. In the beginning, mercantilism was leading in rationalized parts of Europe nation since

International Trade 3
16th to 18th centuries prior falling into drop. This theory promotes nation’s government rules and
regulations for the aim of enlarging state power at the expenditure of contending national
powers. In this way, mercantilism contains a national economic policy intended at
gathering monetary reserves by using an affirmative balance of trade, specifically of finished
goods (Burchill, et al., 2013).
Absolute advantage
In order to understand an absolute advantage theory of international trade we can relate it
with the original concept of economics. A nation with an absolute advantage can offer the goods
and services for less than the nation which does not having the absolute advantage in the relevant
field (Sen, 2010). In this way, a country can only have an absolute advantage when the country
can manufacture goods at a lesser cost than another one. Therefore, we can understand this
theory as absolute advantaged country requires lesser resources to offer the same amount of
goods as comparative to the other countries. Hence, this distinct efficiency of production gives
an absolute advantage that allows the country for a beneficial trade (Enterslice, 2017).
Comparative advantage
In order to get an understanding about this theory, the term comparative advantage should
be illustrated. Comparative advantage is an economic terminology which defines an economy's
capability of producing goods and services at a lesser opportunity cost than the other
global trade partners. In addition, from an economic viewpoint country have a comparative
advantage over another ones while producing particular goods only if they are able to produce
those goods at a lesser comparative opportunity cost (Burchill, et al., 2013).
To illustrate the theory of comparative advantage, here is an example, if I am having
expertise in two distinct fields such as graphics designing as well as writing. Besides, designing
allows me to earn much more than writing. Hence, keeping in this mind that I am able to work
on only one thing at a time, I should hire a writer and the writer and I both should work in a
comparative environment (Burchill, et al., 2013).
Balance of trade
This is a key theory for entire IB as the balance of trade is the variance amid the
monetary value of a country's imports and exports over a selected time period. In this way, a

International Trade 4
balance of trade refers as the value of a nation's exports minus their imports (Vijayasri, 2013).
We can say that it is the most important component of the country’s current account which
makes it the greatest component of the balance of expenditures that can measure all international
transactions efficiently. This trade balance is an easy component of international trades to
measure while all goods and services are passed from the customs office (Vernon, 2017).
Calculation
Any nation's trade balance = the value of exports – the value of imports
Thus, formula will be TB= X – M
Where: X = Exports; M = Imports; TB = Trade Balance
Importance of International Trade theories for managers
ITTs are very much essential to be understood by the global managers of modern
international business because exports as well as imports in any country are vital for the growth
and development of international economies (Vernon, 2017). Besides, it is a fact that all global
countries do not have the adequate resources and skills which are required to generate assured
goods and services (Shenkar, Luo, & Chi, 2014). Thus, most of the countries import required
goods and services however many countries impose essential trade barriers like tariffs as well as
import quotas for protecting their local industries. Furthermore, benefits of knowing ITTs by the
global managers of IB are as follows:
 Managers are the representatives of any country among IB hence if they will be having
command over ITTs then country can grow their business and growth in international
business (Hill & Hernandez, 2008).
 ITTs’ understanding is important for the managers to understand why global countries
should trade in IB.
 Managers can easily comprehend how world efficiency can be improved from free trade
through studying ITTs.
 Managers of IB will become familiar with the factors which are affecting countries’ trade
patterns to a large extent.

International Trade 5
 By knowing ITTs, managers will grasp the relationship amid foreign trade as well as
international factor mobility which will ultimately assist them while doing business
internationally (Hill C. , 2008).
Government’s involvement in international business and impacts on an
international company
The government of any nation gets involved in IB because of the following reasons:
 International trading enables the country to become specialized in the manufacturing as
well as exportation of goods which can be produced efficiently in the country.
 Govt. can import the products for their own nation which can only be produced
efficiently as well as economically in other trade countries (Burchill, et al., 2013).
 Through Government’s involvement in our company, our growth opportunities as well as
development will be increased.
 Government’s involvement in IB will further enable smooth operation of the trade
internationally and can reduce tariffs for the trade which will enhance company’s revenue
(Bell, Bryman, & Harley, 2018).
Conclusion
In conclusion, the report has successfully researched as well as analyzed the different
ITTs for the effective operation of IB. It has also demonstrated the role of government in IB as
well as its impacts over an international company. Theories like balance of trade, comparative
advantage and absolute advantage have been discussed with their proper illustration. Finally,
from the global manager’s viewpoint importance of ITTs has been discussed so that IB can grow
effectively.

International Trade 6
References
Bell, E., Bryman, A., & Harley, B. (2018). Business research methods. London: Oxford
University Press.
Burchill, S., Linklater, A., Devetak, R., Donnelly, J., Nardin, T., Paterson, M., & True, J. (2013).
Theories of international relations. UK: Macmillan international higher education.
Enterslice. (2017). Introduction and Types of International Business Environment (IBE).
Retrieved 12 02, 2018, from https://enterslice.com/learning/international-business-
environment-ibe/
Hill, C. (2008). International business: Competing in the global market place. Strategic
Direction, 24(9).
Hill, C., & Hernandez, W. (2008). Global business today. New York: McGraw-Hill Irwin.
Sen, S. (2010). International trade theory and policy: a review of the literature. NY: Levy
Economics Institute of Bard College.
Shenkar, O., Luo, Y., & Chi, T. (2014). International business. London: Routledge.
Vernon, R. (2017). International investment and international trade in the product cycle.
London: Routledge.
Vijayasri, G. (2013). The Importance of International Trade in the World. International Journal
of Marketing, Financial Services and Management Research, 2(9), 111-119.