International Trade Theory – Humans are social beings who live not far from the economy to be able to support their lives. One of them is regarding the fulfillment of basic needs in human life. The trick is to buy and sell.
Just as an individual depends on buying and selling or trading activities, a country cannot live alone without the help or cooperation of other countries.
Therefore, in order to meet the needs of their people, countries also cooperate by holding international trade. Further, the following is the understanding and theory of international trade according to experts.
Definition of International Trade
In general, international trade can be interpreted as a cooperative relationship between two or more countries to be able to meet the needs of their people. Several experts also expressed their opinions regarding the meaning of international trade.
Here are some experts who express their opinions regarding the notion of international trade.
1. Serlika Aprita and Rio Adhitya
According to Serlika and Rio, international trade has a close relationship with finance. This is because international trade and finance cannot be separated from one another, because they are related.
2. Huala Adolf
According to Huala Adolf, international trade is an activity of exchanging or even buying and selling activities that occur between countries as an effort to gain benefits or profits from this activity.
3. Lestari and Setiawan
Lestari and Setiawan define international trade as an activity of trade carried out by a resident who is in a country with other countries with an agreement mutually agreed upon.
4. Basri and Munandar
According to Basri and Munandar’s view, international trade is trade that occurs because there are countries that have a resource that is different from the countries that are invited to cooperate. According to Basri and Munandar, this international trade can occur due to the production of goods in large quantities.
From the four definitions of international trade according to these experts, it can be concluded that international trade is a buying and selling activity that involves two or more countries working together with an agreement that has been mutually agreed upon and occurs due to the production of goods in very large quantities.
This international trade can occur because not all existing countries are countries that are able to meet their country’s needs for goods and services needed by residents of these countries.
After you know the meaning of international trade, then you also need to know the theories that exist in international trade according to experts.
International Trade Theory According to Experts
There are several theories in international trade, namely first the fundamental theory of international trade as well as several derivative theories put forward by experts. The basic theory of international trade is divided into two, namely the theory of international trade regarding absolute advantage and the theory of comparative advantage. Here’s the full explanation.
1. International Trade Theory of Absolute Advantage
The basic theory of international trade with absolute advantage explains that internationally, international trade can provide benefits for a country. If the country that establishes international trade fulfills the conditions for production by setting a lower price, when compared to other countries that produce the same goods.
To make it clearer, here is an example of the basic international trade theory of absolute advantage. An example is if a country produces 5 pieces of paper per hour, then country B produces 2 pieces of paper per hour.
When seen, there are differences in the amount of production in the two countries. This could be due to differences in the effectiveness and efficiency of paper production in the two countries.
Country A may be more effective and efficient and can produce more paper, but country A may also be slow in terms of the production of other goods which are effective and efficient if produced by country B.
Because the two countries have different effectiveness and efficiency in producing a good, the two countries can carry out international trade so that countries that are unable to meet the amount of production of a good can be met by carrying out international trade earlier.
2. International Trade Theory of Comparative Advantage
The second basic theory regarding international trade contains about a country that does not have an absolute advantage in the production of goods. The country can carry out international trade by choosing or buying goods which according to the government of that country are more effective or efficient for a production process.
Thus, when the country buys an item that can support the production process of an item in that country, it can make the production of goods more efficient and effective.
An example is when country A wants to produce paper, but the basic materials for making paper and the tools that can support making the paper are very expensive in country A.
Thus, it will be less efficient for country A to produce paper using materials and equipment from the country, because it will affect the selling price of the paper. To be able to overcome the high price of materials, country A also conducts international trade by purchasing cheaper materials in country B, so that the problem of the high cost of basic materials for making paper is resolved.
From the example above, it becomes more efficient and effective for country A to buy materials and supply tools from country B so that country A can sell paper products at affordable prices. So that residents of country A have no difficulty in obtaining these paper products.
In addition to the basic theory of international trade, there are also several experts who also put forward their theories regarding this international trade. Here is the theory of international trade according to experts.
3. Economic Theory of Mercantilism
This third theory was introduced by Victor de Riqueti and Marquis de Mirabeau in 1763. This theory of international trade explains the wealth of a country which is calculated by gold and silver.
This mercantilist economic theory assumes that when export activities occur, they must be carried out as often as possible. Also, import activities carried out by a country must be carried out as minimally as possible. The goal is that the economic conditions in the country become stronger and richer.
That is, in international trade, a country can carry out export activities and it is better to do it as often as possible. Meanwhile, to carry out import activities which are also included in international trade, it should be done as minimally as possible.
Thus, domestic traders or producers become more prosperous. Because merchandise from local residents will sell better and have a more affordable price compared to goods from other countries. What’s more, traders can also sell more through export activities from this international trade cooperation.
4. Theory of Heckscher Olin or HO
The fourth theory of international trade was put forward by an economist from Sweden named Eli Heckscher and Bertil Olin who were none other than Eli’s students.
This theory is also better known as The Proportional Factor Theory. According to Eli and Bertil, this international trade theory relates to countries that have high factors of production, as well as production costs that tend to be cheap. So that it will be easy for the country to export with specialization in products that are produced effectively and efficiently by that country.
And vice versa, if a country has scarce production factors with quite expensive production costs, then that country will import from other countries to fulfill the shortage of goods that the country cannot produce.
5. Reciprocal Demand Theory
The theory of reciprocal demand was put forward by John Stuart Mill who continued from the comparative theory proposed by Ricardo. According to this reciprocal demand theory, JS Mill explained that there is a balance point in the exchange of goods that occurs between two countries with the ratio of the exchange being to determine the Domestic Exchange Basis or DTD.
JS Mill’s theory emphasizes more on the balance between demand and supply. Because, demand and supply are determinants that can determine the amount of goods that will be exported or imported by a country.
Because the theory of reciprocal demand is a continuation of the comparative theory, the two theories are not too different. However, of course the two theories have differences.
The difference between comparative theory and reciprocal demand is the determination of the International Exchange Rate or also known as DTI. According to comparative theory, international trade will benefit if the DTI is 1 : 1.
Meanwhile, according to the theory of reciprocal demand, benefits from international trade can be obtained, without obtaining DTI 1: 1. Provided that the international trade that occurs can be carried out by both parties who work together and provide each other with the same benefits.
According to Mills’ view. International trade will be beneficial for both countries, if the two countries have differences in terms of production and consumption ratios between cooperating countries.
In addition, the number of working hours needed by a country to produce exported goods must be smaller. When compared with the number of working hours to produce imported goods. So, the two countries that work together and carry out international trade will automatically benefit from the international trade that is carried out.
6. Theory of the Neo-Classical School
The fifth theory regarding international trade is the neo-classical school which has a different view from other international trade theories. The theory of this neo-classical school has the view that neither the economy nor the theory is based on labor or production costs. However, it has shifted to the level of satisfaction or marginal utility.
The theory of the neo-classical school is one approach that is a way to express economic theory. The view of international trade with the theory of the neo-classical school also changes other existing theories and methodologies.
Those are six of the fundamental theories of international trade, namely the theory of absolute or absolute advantage and the theory of comparative trade. While the other four are theories according to experts. The six theories can be used as a reference to deepen international trade.
Furthermore, you also need to know the driving factors of international trade that occur between cooperating countries. Here’s an explanation.
Driving Factors of International Trade
International trade can occur, because there are several driving factors that make trade activities occur between cooperating countries. Following are some of the factors driving international trade.
1. Natural Resources Owned by a Country
The first factor of international trade is the existence of Natural Resources or SDA which are the provision for the production of goods. When a country has abundant natural resources, of course the country can use it to produce goods.
An example is a tree that can be used as a raw material for making paper. Natural resources or basic materials are very influential in the creation of a new product. So that international trade activities can run between countries.
2. There are differences in production factors
The second factor of international trade is the difference in the factors of production that occur between cooperating countries. The difference in the factors of production has a relationship between results and the effectiveness of time when producing an item.
For example, country A only produces a small amount of paper. So that country A can order paper from country B to meet the quantity of goods according to demand or consumer demand in country A.
3. There is a domestic need
International trade can also occur due to domestic needs. Needs such as goods and services that do not exist in a country will encourage international trade between countries.
For example, when a country does not have an item, that country will also order and buy from other countries. Likewise with services, for example, when Indonesia often sends migrant workers to Saudi Arabia.
4. Desire to Cooperate
The driving factor for the occurrence of the fourth international trade is the fact that the two countries want to work together. Cooperation between two or more countries is also carried out to be able to improve the welfare of society in general in a country.
5. There is an Economic Cycle and Network Expansion
International trade can encourage economic cycles that occur between cooperating countries, namely with buyers and sellers. In addition to widening the economic cycle, cooperating countries will also benefit from international trade that is carried out and agreed upon.
If international trade is carried out according to the agreement, it will certainly expand the network between countries. With the aim of widening the economic cycle and expanding the network, an international trade agreement has been agreed upon by the cooperating countries.
6. The existence of the Principle of Comparative Advantage
The sixth driving factor of international trade is the principle of comparative advantage. This means that each country has its own advantages. The purpose of having an advantage, is when a country has something that is not owned by other countries, for example such as Natural Resources or Human Resources.
The advantage possessed by a country is also a source related to income for that country.
- International Organization
- Meaning of Summons
- Example of a column balance
- Example of Bank Reconciliation
- Economic Principles
- Definition of Scarcity
- Definition of Macroeconomics
- Microeconomics
- Economic Recession
- Economic Globalization
- People’s Economy
- Economic agents
- Economic Problems in Indonesia
- Economics
- Types of Economic Systems
- People’s Economy
Those are the six factors driving international trade between cooperating countries.