Analysis of International Trade Theories and Their Application to Current International Trade Practices

Running head: INTERNATIONAL ECONOMICS
Analysis of International Trade Theories and Their Application to Current International
Trade Practices
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Table of Contents
Introduction:...............................................................................................................................2
Trade structure of the chosen countries:....................................................................................3
Absolute advantage and comparative advantage of the chosen countries:................................7
a: Absolute advantage:...........................................................................................................8
b: Comparative advantage:...................................................................................................10
Factor endowment trade and income distribution:...................................................................11
a: Hecksher-Ohlin model:....................................................................................................11
b: Stolper-Samuelson model:...............................................................................................13
Context of new trade theories:.................................................................................................13
a: Economies of scale:..........................................................................................................13
b: Imperfect completion and market power:........................................................................15
Conclusion:..............................................................................................................................16
Reference:................................................................................................................................17

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Introduction:
International trade is one such phenomenon that incorporate the exchange of the
goods and services as well as the capital, labour and others across the international border or
within the states. During the 21st century, there has been rise in the studies regarding the
international trade owing to its magnitude and far reaching impact on the social welfare
(Jones & Kierzkowski, 2018). International trade has been persistent event of the world
history that took place since the earlier human life when the tribes started to exchange goods
in lieu of other good that they cannot produce. Over the years, there has been rise in the
international trade through rise in the globalisation which is such a phenomenon that is aimed
to convert the world market into a single market. International trade is aimed to provide
higher amount of growth prospect to the trade participating nations through providing lower
cost goods and services and allowing them to export such goods and services in which said
economy expertise (Feenstra, 2015). In addition to this international trade provide rise to the
world economy where demand and supply, prices and global events are main factors that
plays crucial role. On the other hand, considering the domestic market, it can be seen that
these factors are also responsible for the influence on the domestic economy. With the rise in
the trade, there will be scope for the higher growth of the development that will allow the said
macroeconomic variables to fluctuate towards better growth prospect and future sustainability
of the economy (Low, 2016). For instance, if international trade between two economies take
place, then it can be seen that, trade participating nations face higher growth prospect through
the rise in the labour employment, skill development of the labour and transforming the same
from unskilled labour to the skilled labour that enhance the performance of the overall
economy (Brack, 2017).
It has been clear that international trade around the world and it provides large scale
of benefit to the trade participating nations, however, depending upon the economic condition

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of the trade participating nations, it can be seen that outcome of trading vary widely. In order
to trace the impact of the international trade in present date, this report is aimed to perform
analysis of International Trade Theories and Their Application to Current International Trade
Practices (Van & Lewer, 2015). For better understanding of the same, the report will consider
two economies, which are Switzerland and japan. In order perform the analysis of
international trade theories and apply the same to current international trade, the report will at
first state portray the trade structure of the chosen countries with the numerical values and
then portray why trade occur between the two country. For this purpose, the report will
consider the absolute advantage and comparative advantage theories, which are known as the
corner stone of the trade theory. Post this analysis, the report will portray the trading of the
chosen countries with the Hecksher-Ohlin model and Stolper-Samuelson model that will
define the factor endowment trade and income distribution of the trade participating nations.
Moreover, considering the new trade theories this report will define the economies of scale
and imperfect completion and market power which will portray the performance of both the
trade participating nations.
Trade structure of the chosen countries:
Selected economies for the report is Japan and Switzerland which are known for their
outstanding trade development during the recent past. Considering the export volume of
japan during 2017, the economy ranks 4th among all the trading nations; whereas, when it
comes to the Switzerland, then the economy is 15th in the list showcasing the high trade
potential of both the economies. The economy of japans is one of the highly developed and
open market economies around the world, which is the third largest economy as per the
nominal Gross Domestic Product (GDP) in the world. If the Purchasing Power Parity (PPP) is
considered, then the economy is the fourth largest nation. Japans is well known or its trade
surplus and additionally it has considerable net international investment surplus that

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highlights the magnitude of the trade (Omri et al., 2015). As per the 2010 data, japans has
13.7% of world’s financial assets that showcase the trade openness of the said economy
(Gokmenoglu et al., 2015). In addition to this it can be seen that mineral abundance of the
Japanese economy has aided the domestic economy to survive the destruction during the
Second World War and transformed itself as one of the capital abundant economy. Trading
history of Japanese economy is well established and well developed since the 16th century,
when the economy came into contact with the European civilisations (Jebli & Youssef,
2015). Through the renaissance japan has perceived sophisticated feudal society which has
highly strong dominance over the peer nations in case of the technological advantage. Next to
this, during the time of 16th century to 18th century it can be seen that trading between the
various nations with japans eventually increased that has aided the economy to transform
itself as one of the developed nations (Laursen, 2015). Nowadays japan has variety of
industries ranging from handicrafts to large rockets and technologically upgraded equipment
that has made the economy into a well-established trading nations. Trade is one of the main
source of the total GDP income of the domestic economy and as per the statistics the
economy is accounted for the 12.5% GDP share out of total GDP of the country. Main
trading partners of japan is United States which is accounted for the 20.2% trade out of total
goods and services exported from japan and next to this comes China (Castinot et al., 2016).
Though presently japan and china, are going through the border dispute in South China Sea,
it can be seen that there is lot of trade between these two trading partners. As per the
statistics, china is accounted 17.6% trade share out of total trade of the japan making china
one of the best and well-weathered trading partner of the economy (Levchenko & Zhang,
2016). On the other hand, European Union (EU), South Korea and Taiwan are the other
nations that possess higher ranks in case of trade with japans. Considering the import volume
from the countries from where Thailand import varies widely. For instance, china is

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accounted for the 25.8% goods and services out of total import, and EU is the second largest
exporter to Thailand with the 12.4% share of total imports. As the main source of the export
goods and service, japan sends motor vehicles by a large extent which is considered 14.9% of
total export (Hanson et al., 2015). On the other hand petroleum is the highest importing goods
that japan import from its trading partners. This large amount of trade has provided the
Japanese economy to possess 683.3 billion of export value as per the 2017 data and it can be
seen from the data of 2017 japan import 625.9 billion dollar of goods and services from its
trading partners providing a positive trade value at the end of the financial year (Davis &
Dingel, 2014).
Moving forward to the economy of Switzerland, it can be seen that, this economy is
another developed economy around the world, which is depended upon the trading for the
better growth prospect. Economy of Switzerland has a well-established service sector that
produces 71% of GDP of the economy, whereas agricultural sector provide only 1.3% of the
GDP and rest amount, which around 27.1% is sourced by the industrial sector making it one
of the highly developed economy (Castinot et al., 2015). Switzerland is the third richest
landlocked economy around world and as per the nominal GDP it is 19th largest economy.
When it comes to trade, then it export 3083 billion dollar of good and services as per the 201
data, which rose by 19.2% from 2010 (Do et al., 2014). Considering the import of the
economy, it can be seen that economy of Switzerland is accounted for 299.6 billion dollar of
goods and service import from its trading partners during 2011 that highlights a positive trade
balance by the end of 2011 (Bowen, 2018). One of the most important trading partner of
Switzerland is Germany, which is accounted for 21% of export for the country and 29%
import toward the country out of total export and import volumes from the economy
respectively (Vollrath, 2016). Second largest trading partner of Switzerland is US which is
accounted for 9.1% export of total goods an service and 6.7% of import out of total import