New trade theories added to the old theories.

Essay by montanadevilA-, April 2004

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New trade theories added to the old theories.

Modern economists has contribute more on old theories to make the theory of international trade more better and realistic. In his theory, David Ricardo depended on the restrictive assumption of the labor theory of value, in which labor was assumed to be the only factor input. But, modern economists believe that there are several other factor inputs and labor is only one of them. So they provide with a more generalized theory of comparative advantage by using "production possibilities schedule". This schedule shows various alternative combinations of two goods that a nation can produce when all of its factor inputs like land, labor, and capital are used in their most efficient manner. This production possibilities schedule shows that there are different other factor input of a nation other than labor. Therefore, this theory give more realistic idea of international trade.

To illustrate the concept of comparative advantage, modern economist add marginal rate of transformation (MRT) to the old theories.

The MRT shows the amount of one product a nation must sacrifice to get one additional unit of the other product. This rate of sacrifice is called the opportunity cost of a product. This gives us more idea about which product must be sacrificed for each additional product produced while doing trade.

Next theory added by modern economist John Stuart Mill was called Theory of reciprocal demand. This theory suggests that the actual price at which trade takes place depends on the trading partners' interacting demands. According to Mill, the equilibrium terms of trade depends on the demands of each nation for the other nation's product. This theory give us an idea about which nation will gain if two nations of unequal economic size trade each other. According to this theory, if one...