World Trade

Traditional and most developed form of international relationships is world trade. World trade is around 80 percent of all international economical relationships. International trade is a form of communications between manufactures of different countries that comes out as a result of world labor division, and express mutual economic dependence. Wild, in his book gives us a definition of world trade as: “The purchase, sale, or exchange of goods and services across national borders induced by sellers, buyers and intermediary in different countries.” International trade includes import and export of goods and services; ratio between them is called trade balance.

According to international trade theory of David Ricardo, every country should specialize on manufacturing goods that it has comparative advantage in: lower costs on labour and raw materials. Ricardo states that in this case, every country will benefit. This makes world trade necessary for all countries.

International trade in basically is based on supply and demand. If manufactures of goods or service providers from one country are ready to satisfy the demand of people in another country, the trade between these countries can be performed. If one of these factors, supply or demand, world output factors decreases, then international trade will also decrease. World output and trade are directly related to each other. In case of demand affecting on supply we can take Lebanon as an example. Now, when the political situation is not stable, and the country is at war, purchasing power of population enormously decreased. Therefore demand for most of the products, or services imported in the country before, also decreased. This obviously affects international trade between Lebanon and other countries. While Lebanon at war, same goes for products exported from Lebanon. Due to war, production of some products is stopped. Another example for decrease of supply would be countries that produce wheat. In particular years, wheat harvest is not so good, due to weather conditions, which decreases world wheat output. International wheat trade between countries also decreases.

Supply and demand factors are not the only world output factors that affect international trade. Another factor is money value factor. If a country is in recession due to political or economic reasons, its currency value gets weakened in world market. This makes imports for this country more expensive. Therefore, imports of the country decrease. This affects in trading balance, and world trade.

The exact pattern of international trade is practically impossible to determine. One of the biggest reasons for that is underground trade in economies, or so called “black market”. The second reason for that is because governments of some countries choose to distort some goods products or materials that cross borders. Example would be armor and ammunition, other military equipment, vehicles and other goods. But some agencies that are available in most countries provide us with broad data that can give us a picture of broad patterns of world trade.

Several models were used to determine patterns of international trade.

One of them, model of David Ricardo, so called “Ricardian model” ahs been discussed already earlier. It emphasizes on comparative advantage of each country in producing a product. Perhaps it is the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best.

Another theory produced, is The Heckscher-Ohlin model theory. It was provided as an alternative to Ricardian model. The theory argues that 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. (wikipedia.org). But this theory was argued by russian economist Vasiliy Leotiev, that during his observation of US economy stated that in US export it is mostly labour-intensive products, while in import it is mostly capital-intensive goods and products. (Leontiev, V, p338)

Gravity model theory is third theory for determination of international trade patterns, and it is based on empirical analysis of trading patterns. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries' economic sizes. Theory mimics Newton’s law of gravity, which also considers distance between objects and sizes of these objects. Other factors such as income level, diplomatic relationships between countries, and trade policies are also included in expanded versions of the model. (wikipedia.org).

Wild, in his book gives us some statistics on international trades. He states