What Is International Trade Theory?

Read this introduction to mercantilism and the difference between classical country-based theories and modern firm-based theories. What is the historical significance of mercantilism for international trade patterns?

2.1 What Is International Trade Theory?

Key Takeaways

  • Trade is the concept of exchanging goods and services between two people or entities. International trade is the concept of this exchange between people or entities in two different countries. While a simplistic definition, the factors that impact trade are complex, and economists throughout the centuries have attempted to interpret trends and factors through the evolution of trade theories.
  • There are two main categories of international trade – classical, country-based and modern, firm-based.
  • Porter's theory states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. He identified four key determinants: (1) local market resources and capabilities (factor conditions), (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.