Theories of International Trade
Theory of mercantilism, theory of neo-mercantilism, absolute cost advantage theory,
comparative cost advantage theory, Heckscher-Ohlin Theory of factor proportion, Country
similarity theory, International Product life Cycle theory, Country Size theory, Independenceinterdependence-
dependence theory, Strategic Rivalry theory, Porter’s Competitive
Advantage theory, etc are dealt.
• Theory of Mercantilism
The mercantilists proposed theory of mercantilism. They were a group of
economists who preceded Adam Smith. The foundations of economic thought between
1500 and 1800 were based on mercantilism. Mercantilists believed that the world had a
finite store of wealth; therefore, when one country got more, other countries had less.
Mercantilists restricted imports and encouraged or subsidized exports as a conscious policy
to make their citizens better off. Mercantilists judged the success of trade by the size of the
Mercantilism was a sixteenth-century economic philosophy that maintained that
a country’s wealth was measured by its holdings of gold and silver. This required that the
countries to maximize exports and minimize imports. The logic was transparent to sixteenthcentury
policy makers that if foreigners bought more goods from us than we bought from
them, then the foreigners had to pay us the difference in gold and silver, enabling us to
amass more treasure. With that treasure we could expand the nation’s global influence.
Politically, mercantilism is popular with many manufactures and their workers.
Export-oriented manufacturers favoured mercantilist trade policies, such as those giving
subsidies or tax rebates, which stimulated their sales to foreign buyers. Domestic
manufacturers threatened by foreign imports endorsed mercantilist trade policies, such as
those imposing tariffs or quotas, which protected them from foreign competition according
to Mahoney, Trigg, Griffin, & Pustay.