3.2 An introduction to trade theories
World history is essentially a story of wars and trade, and historians generally agree that most wars are fought for economic, that is, trade-related reasons. Theories of international trade attempt to provide explanations of trade motives, underlying trade patterns and the benefits that flow from trade. An understanding of these basic factors enables individuals (as investors or consumers), companies and governments to determine how to act for their own benefit within the trading system. The major questions to be answered through such an examination of trade are:
- Why does trade occur? Is it because of price differentials, supply differentials, differences in tastes, or other reasons?
- What commodities or services are traded, and what are the terms of trade agreed upon?
- Do trade flows relate to specific economic and social characteristics of a country?
- What is the importance of technology in determining the patterns of trade between countries?
- What are the gains from trade and who realises these gains?
- What are the effects of restrictions placed, usually by governments, on trading activities?
The theories discussed in this chapter answer some of these questions. No theory by itself provides all the answers, but each contributes something to our understanding of the complexities of world trade.
Theories of trade have evolved over time, beginning with the emergence of strong nation-states such as Spain , Portugal and England , and the organisation of systematic exchanges of goods between these nations. The theories are associated with discrete time periods and our discussion begins with mercantilism , the trade theory that formed the basis of economic thought from 1500 to 1800.
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