Theory of Country Size

Theory of Country Size Theory of Country Size The theory of absolute advantage does not deal with country-by-country differences in specialization; however, some recent research based on country size helps to explain how much and what type of products will be traded. Variety of Resources The theory of country size holds that because countries with large land areas are more apt to have varied climates and natural resources, they are generally more nearly self-sufficient than smaller countries. Most of the very large countries such as Brazil, China, India, the United States, and the former Soviet Union import much less of their consumption and export much less of their production than small countries such as Iraq, the Netherlands, and Iceland.5 Although this relationship generally holds true, there are exceptions. Albania, for example, is a small country for which trade is a small percentage of national income because of its stringent restrictions on trade. Transport Costs Although the theory of absolute advantage ignored transport costs, these costs affect large and small countries differently. Normally, the farther the distance, the higher are the transport costs, and the average distances for trade are higher for large countries. Assume, for example, that the normal maximum distance for transporting a given product is 100 miles because, beyond that distance, prices increase too much. Most of the production and market in the United States are more than 100 miles from the Canadian or Mexican borders. In the Netherlands, however, almost the entire production and market are within 100 miles of its border. Transportation costs thus make it more likely that small countries will trade. Scale Economy Although land area is the most obvious way of measuring countries’ size, countries also may be compared on the basis of their economic j>ize. Countries with large economies and high per capita incomes are more likely to produce goods that use technologies requiring long production runs because these countries develop i ndustries to serve their large domestic markets. These same industries tend to be competitive in export markets as well.

International trade of capital, goods, and services across international borders or territories. territories. International trade is the exchange of capital,

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In most

countries, such trade represents a significant share of  gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road,Amber Road,Amber Road), Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of  of globalization. globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country. International trade is also a branch of economics, of economics, which, together with international finance, forms the larger branch of international of international economics.

Adam Smith displays trade taking place on the basis of countries exercising absolute cost advantage over one another. The Ricardian model focuses on comparative advantage, which arises due to differences in technology or natural resources. The Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country. The Ricardian model makes the following assumptions: 1. Labor is the only primary input to production 2. The relative ratios of labor at which the production of one good can be traded off for another differ between countries Heckscher-Ohlin model n the early 1900s a theory of international trade was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory has subsequently been known as the Heckscher-Ohlin model (H-O model). The results of the H-O model are that countries will produce and export goods that require resources (factors) which are relatively abundant and import goods that require resources which are in relative short supply. In the Heckscher-Ohlin model the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, such as the Leontief paradox, were noted in empirical tests by Wassily Leontief who found that the United States tended to export labor-intensive goods despite having an abundance of capital. The H-O model makes the following cor e assumptions: 1. Labor and capital flow freely between sectors 2. The amount of labor and capital in two countries differ (difference in endowments) 3. Technology is the same among countries (a long-t erm assumption) 4. Tastes are the same. 5.

Reality and Applicability of the Heckscher-Ohlin Model  In 1953, Wassily Leontief published a study in which he tested the validity of the Heckscher-Ohlin theory. The study showed that the U.S was more abundant in capital compared to other countries, therefore the U.S would export capital-intensive goods and import labor-intensive goods. Leontief found out that the U.S's exports were less capital intensive than its imports. After the appearance of Leontief's paradox, many researchers tried to save the Heckscher-Ohlin theory, either by new methods of measurement, or either by new interpretations. Leamer

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emphasized that Leontief did not interpret H-O theory properly and

claimed that with a right interpretation, the paradox did not occur. Brecher and Choudri found that, if Leamer was right, the American workers' consumption per head should be lower than the workers' world average consumption. Many textbook writers, including Krugman and Obstfeld and Bowen, Hollander and Viane, are negative about the validity of H-O model.After examining the long history of empirical research, Bowen, Hollander and Viane concluded: "Recent tests of the factor abundance theory [H-O theory and its developed form into many-commodity and many-factor case] that directly examine the H-O-V equations also indicate the rejection of the theory."

Trade Theory of Country Size Country size has some definite relation to international trade as to what is traded, how much is traded and so on. The classical

trade theories do not go into country-by-country differences in size to deal with the lines of specialization. When a small and big country are involved, the small country may be pushed into specialization, but not the big one for all its need for the other product can’t be produced by the other small country, nor that small country take all export surplus of the big nation resulting

from specialization. Thus a nexus exists between global trade and country size. 1.

Vastness of Country size and Variety of Resources go together: Size of a country is measured by the geographical space here.

Big countries have vast space and hence more and diverse resources. With that they could be self reliant. Considering their size, their exports and imports are l ess as against those of small countri es with fewer resources.

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Vastness of country size and High transport cost go together, reducing global trade : Cost advantage theories of international

trade conveniently ignored transport cost to international markets. For small countries in trade relations, transport cost to international borders and from there to international markets is lower. For big countries in trade relations, transport cost to international borders and from there to international markets is higher. 3.

Vastness of Economy and International Trade go together: Instead of physical space, size can be measured by the GDP and

Per-capita income. Normally big ones tend to trade more internationally, because they can cater to international consumers as they have technology and can import more as well as they long pockets to pay for the same as well. 4.

Long-production runs and international trade go together : Products with longer production runs are generally produced in

fewer countries/locations than those with shorter production runs, which are produced in many countries/locations. The former need to be traded globally, while the later gets consumed within the domestic market. Steel is globally traded more because of its longer production run, while soft-drinks are just domestically traded as these have shorter production run. Usually products with long-production runs are favored by vast economies. Trade Theory of Technology Gap

Technology gap theory views technological asymmetries as important long run determinants of trade flows. Moreover, it also captures interactions between trade flows and changes in long run growth patterns and levels of employment. A model of technology gap was first written by Josiah Tucker in the mid-1700s. Tucker was the first writer to posit a “formal” model which made use of dynamic gains from trade in accounting for the evolution of trade patterns. In other words, Tucker developed cumulative causation model of trade in which the gains provided by specialization from trade create new opportunities for further growth and trade. Tucker was profoundly interested in the relationship between the growth of poor countries and that of rich ones such as, his homeland, England. Specifically, several writers had expressed concern that England’s export markets would be taken over by

poorer countries that could produce goods cheaper because of their lower wages and other costs. Tucker responded with an increasing returns argument that demonstrated the cost advantages of richer countries in the production of the most complex commodities: The rich country not only has the best tools and technologies, but also the “superior Skill and Knowledge (acquired by long Habit  and Experience) for inventing and making of more. ” Moreover, the rich country need not rely only on the “genius” of its own manufacturers and farmers to maintain this pace of innovation. The high wages, easier access to capital, and greater “Exertion of  Genius, Industry, and Ambition“will cause the best and brightest of the poor countries to emigrate to the rich ones, draining the “Flower of its [the poor countries] inhabitants“. This brain drain opens “larger competencies“, creates more employment for the

natives, helps and improves old manufactures, and sets up new ones; thus impoverishing competitors, and the same time enriching tech “superior “: (Tucker 1974: 31)

The technology gap theory of international trade tells that a country that is competitive in the production of the complex goods will rule the global trade and achieve higher level of economic development. Poor countries produce simple commodities cheaply, while the more complex commodities are cheaper in the rich countries. Third world countries because of their technological backwardness are either primary goods exporters or just exporters of ores, while developed countries trade in top end electronic goods, pharmaceuticals, destructive missiles, etc.