International Trade and Competition Essay Example | Topics and Well Written Essays - 2000 words

International Trade and Competition - Essay Example Certain policies that should be employed by different trading nations all over the world in order to combat the effects of GFC have also been studied. 2. Trade Theories 2.1 Mercantilism This theory of international trade existed in the mid of 16th century. It postulated that the wealth of a nation depends on its accumulated treasure mainly in the form of gold. Trade surplus was believed to be the key trade practice. However, it had disadvantages of having restrictions in the form of government intervention and impaired growth (Reynolds, 2000). 2.2 Theory of Absolute Advantage This theory is believed to be developed by Adam Smith. It was against the mercantilism trade theory and brought in the concept of free trade. Different countries can take advantage of their efficiency in producing different products and trade for the other products. Hence all the countries would have simultaneous advantages while practicing free trade (skidmore.edu, 2007, p.1). 2.3 Theory of Comparative Advantag e This is an extension of the free trade mechanism theory. This theory takes into consideration two important concepts, namely opportunity cost and the frontier of production possibility. It believes in efficient utilization of existing resources leading to the increase in productivity. A country may be efficient in producing certain products but still it should import from other country if it is comparatively advantageous for the country (hawaii.edu, n.d.). 2.4 Factor Proportions Trade Theory It is also known as Heckscher – Olin Theory. This theory states that those goods should be exported which are locally available in plenty and that makes intensive use of factor endowments. Factor endowments are the main determinants of trade and not its productivity. Here the focus is more on relative advantage rather than absolute advantage. It takes into consideration two important factors of related to production. They are labor and capital (ups.edu, n.d.). 2.5 New Trade Theory The i ndustries whose fixed costs are relatively high output are enhanced through specialization. The effects of learning are also quite high. Only few competitors will be supported through the world demand. International trade results in increased income and output for a country. This results in enhanced savings as well. Rise in competition amongst different countries results in gains in trade which are dynamic in nature. 3. Global Financial Crisis (GFC) Global Financial Crisis (GFC) that took place in 2008 proved to be a historical event in world economy. It had a substantial effect on most of the nations in the world. It has led to the debacle of big financial institutions like Lehman Brothers all around the world. It resulted in the decline of share markets all over the world. It all started in United States with the fall of its market involving sub-prime mortgages. Introduction of complex financial instruments has also been one of the prime reasons behind the crisis. Securitization o f mortgage loans in US was done with the objective of mitigating risk but ultimately it led to the increase of risk through increased use of derivatives instruments in the market as speculative instruments and finally resulted in financial crisis. GFC have