Modern theories of international trade

Modern theories of international trade either develop the principles of classical theories, extending them to a greater number of goods, countries and factors of production, or study individual aspects of international trade that, for whatever reason, have remained unexplained by classical theories. One group of recent theories considers international trade mainly from the supply side of goods. Another group of theories completely rejects classical theories, declaring them obsolete, and offers its own explanation of international trade. This group of theories usually focuses on the analysis of the supply and demand for goods in international trade.

The development of the theory of comparative advantages of D. Ricardo went in several directions (Fig. 1): the most popular was the theory of the ratio of factors of production Heckscher – Ohlin, which substantiated the need to determine the comparative advantage in foreign trade based on the assessment of factors of production, their ratios and interrelation. These theories belong to the group of the latest theories of the neoclassical school. At the present stage, the neoclassical school coexists with the neotechnological one, which has been developed since the middle of the twentieth century on the basis of NTR.

The neotechnological school associates the main advantages with the monopoly position of the firm (and the country) – the innovator. Hence the  new optimal strategy for individual firms: to produce not what is relatively cheaper, but what is necessary for all or many, but which no one else can produce yet.

The attitude towards the state has also changed: neotechnological economists believe that the state can and should support the production of high-tech export goods and not interfere with the curtailment of the production of other, obsolete ones.

Neotechnological theories include the following:

the theory of the technological gap of M. Posner (1961); the theory of economies of scale of Camp (1964) and imperfect competition of P. Krugman (1979); the theory of the product life cycle of R. Vernon (1966); the theory of intra-industry trade of B. Balas (1967); theory of competitive advantage of the nation by M. Porter (1986).

One of the directions of neotechnological theories is the theory of the product life cycle. This theory attempts to explain the functioning of the world trade in finished goods on the basis of the life cycle of the product. Its essence is that each new product goes through a cycle that includes the stages of implementation, expansion, maturity and aging, on the basis of which modern flows between countries in the exchange of finished products can be explained. In accordance with the cycle, countries specialize in producing the export of the same product at different stages of its maturity. For example, ASEAN countries in the field of technology today are doing what NIS did yesterday and are embarking on the same path of “quality of specialization”.

This theory is based on the assumption that a developed country has a monopoly position in technology, which gives it the possibility of superiority in the invention of new or improved products.

The driving force of the market is the desire of national business entities to maximize net economic profit. This is possible only if they occupy a monopoly position in the world market to create new types of products.

Initially, this monopoly position means that a technologically developed country will seek to increase revenue due to the growth of sales volumes, and therefore increase its share in the world market by exporting a new product. Over time, the product becomes widespread, standardized and can be produced on a mass scale in most countries of the world. Maximization of profits at this stage is possible primarily by reducing variable costs, that is, the use of relatively unskilled labor resources. At this stage of maturity, the product will be cheaper to produce in countries with relatively low wages (and therefore less developed countries will begin to produce it and export it to the country in which it was originally invented).

A classic example of this theory is the experience of the United States and Japan in developing electronics industries in the post-war era. Innovations in the radio, television, stereo, and computer industries came from the U.S., which initially had success from their exports. Japan then adapted American technology and began producing these same goods at a lower cost, which it sold at lower prices. In the 80s, the bulk of the assembly of electrical goods was made in developing countries. The latter destroyed the American and Japanese advantage in trade. It is now more profitable for the U.S. and Japan to import these goods from developing countries with low levels of variable and fixed costs. The product life cycle theory corresponds to observed phenomena in the real world and also explains changes in trading patterns over time.

Table 3.

Commodity life cycle and international trade

Stages of the life cycle





Production location

In the country of innovation

In the country innovations and other developed countries

In many countries

In developing countries

Market Placement

In the country innovations with a small share of exports

In the country innovations and developed countries. Export growth

In developed and developing countries. Stabilization of demand

In developing countries with a small share of exports. Decline in demand

Competitive advantages

Monopoly. The price covers all costs, including the creation of goods. Net economic profit is maximized

Oligopoly. Competition on quality, know-how, fixed costs. Implicit costs increase

Perfect competition. Prices stabilize Competition on variable costs. Lower prices and reduced economic profits

Many sellers and few buyers Lower prices. Net economic profit is zero


Limited production. High qualification. Labor-intensive and knowledge-intensive

Large-scale series. Standardization of technologies. Capital-intensive and high labor costs

Mass standardization. High share of capital. Reduced labor costs

Mass. Automated with a high proportion of unskilled auxiliary labor

Another production-side approach is used in the theory of economies of scale (or decreasing costs per unit of output as output increases). The main idea of this theory is that as the scale of production increases, the cost of units of goods decreases. This happens for several reasons:

growth of specialization – each employee can focus on one production function, bring its implementation to perfection, while using more advanced machines and equipment; indivisibility of production – with an increase in the scale of output, the size of service units that are not directly involved in production (management, accounting, etc.) grow relatively slower than the scale of production itself; technological savings – the cost of creating a new quality of goods is usually less than what happens as a result of its increase in value.

Thus, the economy of scale is such a development of production in which the growth of factor costs per unit leads to an increase in production by more than one.

Determining due to what structural shifts the growth of production occurs, external and internal economies of scale are distinguished.

External economies of scale suggest that the number of firms producing the same product increases, while the size of each remains unchanged. Usually, in this case, the market remains sufficiently competitive, which brings the patterns of trade on the basis of this model closer to the classical theories of international trade, which assumed the presence of perfect competition.

The internal economies of scale assume that the volume of production of goods remains the same, and the number of firms producing it has decreased. Thus, the internal economies of scale lead to imperfect competition, in which producers can influence the price of their goods and ensure an increase in sales by reducing the price. An extreme case of internal economies of scale is a pure monopoly. The model of trade within the framework of monopolistic competition proceeds from the fact that international trade increases the size of the sales market. When two countries trade with each other, the aggregate market turns out to be more than the simple sum of the markets of the two countries, the number of firms, and, therefore, the variety of goods they produce increases, and the unit price of the commodity decreases.

A number of modern theories explain international trade from a demand perspective. These include a theory based on differentiated demand. It turns out that the basis of mutually beneficial trade can also be differences in consumer preferences, even in the absence of differences in supply conditions.

An attempt by the manufacturer to more fully take into account the diversity of consumer preferences would lead to an expansion of the model range and a reduction in the number of produced copies of each of the models. And this increases the cost of production. Therefore, it is advisable for the country to limit itself to a relatively small number of models produced, importing other variants of similar products. The consumer’s gain from such trade will be expressed in increased choice and lower prices as a result of economies of scale.

This theory can be illustrated by the example of cars. For example, the U.S. exports and imports cars because they are not completely interchangeable: there will always be American consumers who prefer European cars and Europeans who prefer American cars. Some statistical studies show that 50 % of modern international trade reflects trade in differentiated goods.

Another theory that echoes the theory of differentiated demand is known as Linder’s theory. Developed by the Swedish economist Stefan Linder in 1961, it is based on the fact that differences in the contributions of factors are the basis of trade in resource-intensive and essential goods. These differences also better explain trade between developed and less developed countries. The main determinant of this model of demand is per capita income.

The most significant were the studies of M. Porter, who managed in his theory of the competitive advantages of the nation to reconcile the views of classical and neoclassical economists with the views of representatives of the neotechnological school. In the study “Competitive Advantages of Countries” (1991), M. Porter developed in sufficient detail a completely new approach to the problems of international trade. One of the prerequisites for this approach is the following: “Firms compete in the international market, not countries. It is necessary to understand how the firm creates and maintains a competitive advantage in order to understand the country’s role in this process.”

The competitiveness of a country, according to M. Porter, in international exchange is determined by the interaction and interconnection of four main components (determinants of competitive advantage):

factor conditions, i.e. those specific factors of production that are necessary for successful competition in a given industry; demand conditions for goods and services, i.e. what is the demand in the domestic market for products and services offered by the industry; the strategy of firms in a given country, their structure and rivalry, i.e. what are the conditions in the country that determine how firms are created and managed, and what is the nature of competition in the domestic market; the nature of the related and supporting industries present in the country, i.e. the presence or absence in the country of related or supporting industries that are competitive in the world market.

These determinants form a national “diamond”, which is a system whose components mutually reinforce each other.

This system also includes random events and government actions that can either strengthen or weaken a country’s competitive advantage.

One of the most popular neo-technological concepts of international trade is the model of the technological gap. The basics of this model were proposed by the English economist M. Posner. According to his concept, the country (firm), producing a new product, for a certain time has the so-called quasi-monopoly. Having no competitors in the world market, it receives additional profit from the export of new products. In addition, technological innovations allow a country (firm) to produce goods of traditional exports at a lower cost, strengthening the comparative advantages of this country in international trade.