Chapter 2: The Expansion Of Trade

  1. Two-way trade is often explained by variations in transportation costs and seasonal factors; in similar goods it often occurs in the context of models of imperfect competition. Adjustment costs associated with expansion of two-way trade may be lower than for expansion of one-way trade.
  2. Chapter 2 – The Expansion of Trade Overview. Worldview Inquiry:What impact might increased trade and business have on a society’s worldview? Aspects of Worldview Examined: Geography, Economy, Society. Sections: 1) The Rise of International Trade, 2) The Italian-City States.
  1. Chapter 2: The Expansion Of Trade Barriers
  2. Chapter 2 The Expansion Of Trade
  3. Chapter 2: The Expansion Of Trade Act

From Trade to territory Class 8 History Chapter 2 Explanation. NCERT History Class 8 Chapter 2 - From Trade to territory - The Company establishes power - Ex.

The Achaemenid Empire

Under Cyrus the Great and Darius the Great, the Achaemenid Empire became the first global empire.

Learning Objectives

Discuss the Achaemenid as the first global empire

Key Takeaways

Key Points

  • Around 550 BCE, Cyrus the Great (Cyrus II) conquered the Median
    Empire and started the expansion of the Achaemenid Empire, assimilating the neighboring Lydian and Neo-Babylonian empires.
  • Cyrus the Great was succeeded by his son Cambryses II in 530 BCE and then the usurper Gaumata, and finally by Darius the Great in 522 BCE.
  • By the time of Darius the Great and his son, Xerxes, the Achaemenid Empire had expanded to include Mesopotamia,
    Egypt, Anatolia, the Southern Caucasus, Macedonia, the western Indus basin, as well as parts of Central Asia, northern Arabia and northern Libya.
  • At its height around 475 BCE, the Achaemenid Empire ruled over 44% of the world’s population, the highest figure for any empire in history.

Key Terms

  • Cyrus the Great: Cyrus II of Persia, also known as Cyrus the Great, created the largest empire the world had seen.
  • Darius the Great: The third king of the Persian Achaemenid Empire, who ruled at its peak from c. 522-486 BCE.
  • Median Empire: One of the four major powers of the ancient Near East (with Babylonia, Lydia, and Egypt), until it was conquered by Cyrus the Great in 550 BCE.
  • Pasargadae: The capital of the Achaemenid Empire under Cyrus the Great.

The Achaemenid Empire, c. 550-330 BCE, or First Persian Empire, was founded in the 6th century BCE by Cyrus the Great, in Western and Central Asia. The dynasty drew its name from Achaemenes, who, from 705-675 BCE, ruled Persis, which was land bounded on the west by the Tigris River and on the south by the Persian Gulf. It was the first centralized nation-state, and during expansion in approximately 550-500 BCE, it became the first global empire and eventually ruled over significant portions of the ancient world.

Empire Beginnings

By the 7th century BCE, a group of ancient Iranian people had established the Median Empire, a vassal state under the Assyrian Empire that later tried to gain its independence in the 8th century BCE. After Assyria fell in 605 BCE, Cyaxares, king of the Medes, extended his rule west across Iran.

Around 550 BCE, Cyrus II of Persia, who became known as Cyrus the Great, rose in rebellion against the Median Empire, eventually conquering the Medes to create the first Persian Empire, also known as the Achaemenid Empire. Cyrus utilized his tactical genius, as well as his understanding of the socio-political conditions governing his territories, to eventually assimilate the neighboring Lydian and Neo-Babylonian empires into the new Persian Empire.

Relief of Cyrus the Great: Cyrus II of Persia, better known as Cyrus the Great, was the founder of the Achaemenid Empire. Under his rule, the empire assimilated all the civilized states of the ancient Near East, and eventually conquered most of Southwest Asia and much of Central Asia and the Caucasus.

Achaemenid Expansion

The empire was ruled by a series of monarchs who joined its disparate tribes by constructing a complex network of roads. The unified form of the empire came in the form of a central administration around the city of Pasargadae, which was erected by Cyrus c. 550 BCE. After his death in 530 BCE, Cyrus was succeeded by his son Cambyses II, who conquered Egypt, Nubia, and Cyrenaica in 525 BCE; he died in 522 BCE during a revolt.

During the king’s long absence during his expansion campaign, a Zoarastrian priest, named Guamata, staged a coup by impersonating Cambryses II’s younger brother, Bardiya, and seized the throne. Yet in 522 BCE, Darius I, also known as Darius the Great, overthrew Gaumata and solidified control of the territories of the Achaemenid Empire, beginning what would be a historic consolidation of lands.

Achaemenid Empire in the time of Darius and Xerxes: At its height, the Achaemenid Empire ruled over 44% of the world’s population, the highest figure for any empire in history.

Between c. 500-400 BCE, Darius the Great and his son, Xerxe I, ruled the Persian Plateau and all of the territories formerly held by the Assyrian Empire, including Mesopotamia, the Levant, and Cyprus. It eventually came to control Egypt, as well. This expansion continued even further afield with Anatolia and the Armenian Plateau, much of the Southern Caucasus, Macedonia, parts of Greece and Thrace, Central Asia as far as the Aral Sea, the Oxus and Jaxartes areas, the Hindu Kush and the western Indus basin, and parts of northern Arabia and northern Libya.

This unprecedented area of control under a single ruler stretched from the Indus Valley in the east to Thrace and Macedon on the northeastern border of Greece. At its height, the Achaemenid Empire ruled over 44% of the world’s population, the highest such figure for any empire in history.

Government and Trade in the Achaemenid Empire

Emperors Cyrus II and Darius I created a centralized government and extensive trade network in the Achaemenid Empire.

Learning Objectives

Discuss how the central government provided cultural and economic reform

Key Takeaways

Key Points

  • Cyrus the Great maintained control over a vast empire by installing regional governors, called satraps, to rule individual provinces.
  • When Darius the Great ascended the throne in 522 BCE, he organized a new uniform monetary system and
    established Aramaic as the official language of the empire.
  • Trade infrastructure facilitated the exchange of commodities in the far reaches of the empire, including the Royal Road, standardized language, and a postal service.
  • Tariffs on trade from the territories were one of the empire’s main sources of revenue, in addition to agriculture and tribute.

Key Terms

  • Cyrus Cylinder: An ancient clay artifact that has been called the oldest-known charter of human rights.
  • Behistun
    Inscription
    : An inscription carved in a cliff face of Mount Behistrun in Iran; it provided a key to deciphering cuneiform script.
  • satrapy: The territory under the rule of a satrap.
  • satrap: The governor of a province in the ancient Median and Achaemenid (Persian) Empires.

The Achaemenid Empire reached enormous size under the leadership of Cyrus II of Persia (576-530 BCE), commonly known as Cyrus the Great, who created a multi-state empire. Called Cyrus the Elder by the Greeks, he founded an empire initially comprising all the previous civilized states of the ancient Near East and eventually most of Southwest and Central Asia and the Caucus region, stretching from the Mediterranean Sea to the Indus River. Control of this large territory involved a centralized government, territorial monarchs who served as proxy rulers for the emperor, and an extensive system of commerce and trade.

Government Organization

Cyrus, whose rule lasted between 29 and 31 years, until his death in battle in 530 BCE, controlled the vast Achaemenid Empire through the use of regional monarchs, called satrap, who each oversaw a territory called a satrapy. The basic rule of governance was based upon the loyalty and obedience of the satrapy to the central power, the king, and compliance with tax laws. Cyrus also connected the various regions of the empire through an innovative postal system that made use of an extensive roadway and relay stations.

Cyrus the Great was recognized for achievements in human rights and politics, having influenced both Eastern and Western Civilization. The ancient Babylonians called him “The Liberator,” while the modern nation of Iran calls Cyrus its “father.”

Cyrus Cylinder

The Cyrus Cylinder is an ancient clay artifact, now broken into several fragments, that has been called the oldest-known charter of universal human rights and a symbol of his humanitarian rule.

The cylinder dates from the 6th century BCE, and was discovered in the ruins of Babylon in Mesopotamia, now Iraq, in 1879. In addition to describing the genealogy of Cyrus, the declaration in Akkadian cuneiform script on the cylinder is considered by many Biblical scholars to be evidence of Cyrus’s policy of repatriation of the Jewish people following their captivity in Babylon.

The historical nature of the cylinder has been debated, with some scholars arguing that Cyrus did not make a specific decree, but rather that the cylinder articulated his general policy allowing exiles to return to their homelands and rebuild their temples.

In fact, the policies of Cyrus with respect to treatment of minority religions were well documented in Babylonian texts, as well as in Jewish sources. Cyrus was known to have an overall attitude of religious tolerance throughout the empire, although it has been debated whether this was by his own implementation or a continuation of Babylonian and Assyrian policies.

Darius Improvements

When Darius I (550-486 BCE), also known as Darius the Great, ascended the throne of the Achaemenid Empire in 522 BCE, he established Aramaic as the official language and devised a codification of laws for Egypt. Darius also sponsored work on construction projects throughout the empire, focusing on improvement of the cities of Susa, Pasargadae, Persepolis, Babylon, and various municipalities in Egypt.

When Darius moved his capital from Pasargadae to Persepolis, he revolutionized the economy by placing it on a silver and gold coinage and introducing a regulated and sustainable tax system. This structure precisely tailored the taxes of each satrapy based on its projected productivity and economic potential. For example, Babylon was assessed for the highest amount of silver taxes, while Egypt owed grain in addition to silver taxes.

Persian reliefs in the city of Persepolis: Darius the Great moved the capital of the Achaemenid Empire to Persepolis c. 522 BCE. He initiated several major architectural projects, including the construction of a palace and a treasure house.

Behistun Inscription

Sometime after his coronation, Darius ordered an inscription to be carved on a limestone cliff of Mount Behistun in modern Iran. The Behistun Inscription, the text of which Darius wrote, came to have great linguistic significance as a crucial clue in deciphering cuneiform script.

The inscription begins by tracing the ancestry of Darius, followed by a description of a sequence of events following the deaths of the previous two Achaemenid emperors, Cyrus the Great and Cyrus’s son, Cambyses II, in which Darius fought 19 battles in one year to put down numerous rebellions throughout the Persian lands.

Trade

The inscription, which is approximately 15 meters high and 25 meters wide, includes three versions of the text in three different cuneiform languages: Old Persian, Elamite and Babylonian, which was a version of Akkadian. Researchers were able to compare the scripts and use it to help decipher ancient languages, in this way making the Behistun Inscription as valuable to cuneiform as the Rosetta Stone is to Egyptian hieroglyphs.

Behistun Inscription: A section of the Behistun Inscription on a limestone cliff of Mount Behistun in western Iran, which became a key in deciphering cuneiform script.

Commerce and Trade

Under the Achaemenids, trade was extensive and there was an efficient infrastructure that facilitated the exchange of commodities in the far reaches of the empire. Tariffs on trade were one of the empire’s main sources of revenue, in addition to agriculture and tribute.

Chapter 2: the expansion of trade agreements

The satrapies were linked by a 2,500-kilometer highway, the most impressive stretch of which was the Royal Road, from Susa to Sardis. The relays of mounted couriers could reach the most remote areas in 15 days. Despite the relative local independence afforded by the satrapy system, royal inspectors regularly toured the empire and reported on local conditions using this route.

Achaemenid golden bowl with lion imagery: Trade in the Achaemenid Empire was extensive. Infrastructure, including the Royal Road, standardized language, and a postal service facilitated the exchange of commodities in the far reaches of the empire.

Military

Cyrus the Great created an organized army to enforce national authority, despite the ethno-cultural diversity among the subject nations, the empire’s enormous geographic size, and the constant struggle for power by regional competitors.

This professional army included the Immortals unit, comprising 10,000 highly trained heavy infantry. Under Darius the Great, Persia would become the first empire to inaugurate and deploy an imperial navy, with personnel that included Phoenicians, Egyptians, Cypriots, and Greeks.

Zoroastrianism

Zoroastrianism, an ancient Persian religion, had a major influence on the culture and religion of all other monotheistic religions in the region.

Learning Objectives

Explain Zoroastrianism and its impact on Persian culture

Key Takeaways

Key Points

  • Zoroastrianism is ascribed to the teachings of Zoroaster, an Iranian prophet, who worshiped Ahura Mazda (Wise Lord), as its Supreme Being.
  • Leading characteristics, such as messianism, heaven and hell, and free will are said to have influenced other religious systems, including Second Temple Judaism, Gnosticism, Christianity, and Islam.
  • Zoroastrianism served as the state religion of the pre-Islamic Iranian empires from c. 600 BCE to 650 CE, but saw a steep decline after the Muslim conquest of Persia.
  • The religion states that active participation in life through good deeds is necessary to ensure happiness and to keep chaos at bay.

Key Terms

  • Sassanids: The last Iranian empire before the rise of Islam.
  • Gnosticism: A modern term categorizing a collection of ancient religions whose adherents shunned the material world—
    which they viewed as created by the demiurge—and embraced the spiritual world.
  • messianism: The belief in a messiah, who acts as a savior, redeemer or liberator of a group of people.
  • eschatological: A part of theology concerned with the final events of history, or the ultimate destiny of humanity, often referred to as the “end times.”

Overview and Theology

Zoroastrianism is one of the world’s oldest religions. It ascribed to the teachings of the Iranian prophet Zoroaster (or Zarathustra), and exalted their deity of wisdom, Ahura Mazda (Wise Lord), as its Supreme Being. Leading characteristics, such as messianism, heaven and hell, and free will are said to have influenced other religious systems, including Second Temple Judaism, Gnosticism, Christianity, and Islam. With possible roots dating back to the second millennium BCE, Zoroastrianism enters recorded history in the 5th-century BCE. It served as the state religion of the pre-Islamic Iranian empires from around 600 BCE to 650 CE. Zoroastrianism was suppressed from the 7th century onwards, following the Muslim conquest of Persia. Recent estimates place the current number of Zoroastrians at around 2.6 million, with most living in India and Iran.

The most important texts of the religion are those of the Avesta, which includes the writings of Zoroaster, known as the Gathas and the Yasna. The Gathas are enigmatic poems that define the religion’s precepts, while the Yasna is the scripture. The full name by which Zoroaster addressed the deity is: Ahura, The Lord Creator, and Mazda, Supremely Wise. He proclaimed that there is only one God, the singularly creative and sustaining force of the Universe. He also stated that human beings are given a right of choice, and because of cause and effect are also responsible for the consequences of their choices. The contesting force to Ahura Mazda was called Angra Mainyu, or angry spirit. Post-Zoroastrian scripture introduced the concept of Ahriman, the Devil, which was effectively a personification of Angra Mainyu.

In Zoroastrianism, water (apo, aban) and fire (atar, azar) are agents of ritual purity, and the associated purification ceremonies are considered the basis of ritual life. In Zoroastrian cosmogony, water and fire are respectively the second and last primordial elements to have been created, and scripture considers fire to have its origin in the waters. Both water and fire are considered life-sustaining, and both water and fire are represented within the precinct of a fire temple. Zoroastrians usually pray in the presence of some form of fire (which can be considered evident in any source of light), and the culminating rite of the principle act of worship constitutes a “strengthening of the waters.” Fire is considered a medium through which spiritual insight and wisdom is gained, and water is considered the source of that wisdom.

Chapter

The religion states that active participation in life through good deeds is necessary to ensure happiness and to keep chaos at bay. This active participation is a central element in Zoroaster’s concept of free will, and Zoroastrianism rejects all forms of monasticism. Ahura Mazda will ultimately prevail over the evil Angra Mainyu or Ahriman, at which point the universe will undergo a cosmic renovation and time will end. In the final renovation, all of creation—even the souls of the dead that were initially banished to “darkness”—will be reunited in Ahura Mazda, returning to life in the undead form. At the end of time, a savior-figure (a Saoshyant) will bring about a final renovation of the world (frashokereti), in which the dead will be revived.

Zoroastrian Priest: Painted clay and alabaster head of a Zoroastrian priest wearing a distinctive Bactrian-style headdress, Takhti-Sangin, Tajikistan, Greco-Bactrian kingdom, 3rd-2nd century BCE.

History

Chapter 2: The Expansion Of Trade Barriers

The roots of Zoroastrianism are thought to have emerged from a common prehistoric Indo-Iranian religious system dating back to the early 2nd millennium BCE. The prophet Zoroaster himself, though traditionally dated to the 6th century BCE, is thought by many modern historians to have been a reformer of the polytheistic Iranian religion who lived in the 10th century BCE. Zoroastrianism as a religion was not firmly established until several centuries later. Zoroastrianism enters recorded history in the mid-5th century BCE. Herodotus’ The Histories (completed c. 440 BCE) includes a description of Greater Iranian society with what may be recognizably Zoroastrian features, including exposure of the dead.

The Histories is a primary source of information on the early period of the Achaemenid era (648-330 BCE), in particular with respect to the role of the Magi. According to Herodotus i.101, the Magi were the sixth tribe of the Medians (until the unification of the Persian empire under Cyrus the Great, all Iranians were referred to as “Mede” or “Mada” by the peoples of the Ancient World). The Magi appear to have been the priestly caste of the Mesopotamian-influenced branch of Zoroastrianism today known as Zurvanism, and they wielded considerable influence at the courts of the Median emperors.

Darius I, and later Achaemenid emperors, acknowledged their devotion to Ahura Mazda in inscriptions (as attested to several times in the Behistun inscription), and appear to have continued the model of coexistence with other religions. Whether Darius was a follower of Zoroaster has not been conclusively established, since devotion to Ahura Mazda was (at the time) not necessarily an indication of an adherence to Zoroaster’s teaching. A number of the Zoroastrian texts that today are part of the greater compendium of the Avesta have been attributed to that period.

The religion would be professed many centuries following the demise of the Achaemenids in mainland Persia and the core regions of the former Achaemenid Empire—
most notably Anatolia, Mesopotamia, and the Caucasus. In the Cappadocian kingdom (whose territory was formerly an Achaemenid possession), Persian colonists who were cut off from their co-religionists in Iran proper continued to practice the Zoroastrianism of their forefathers. There, Strabo, observing in the first century BCE, records that these “fire kindlers” possessed many “holy places of the Persian Gods,” as well as fire temples. Strabo furthermore relates, that they were “noteworthy enclosures; and in their midst there is an altar, on which there is a large quantity of ashes and where the magi keep the fire ever burning.” Throughout, and after, the Hellenistic periods in the aforementioned regions, the religion would be strongly revived.

As late as the Parthian period, a form of Zoroastrianism was without a doubt the dominant religion in the Armenian lands. The Sassanids aggressively promoted the Zurvanite form of Zoroastrianism, often building fire temples in captured territories to promote the religion. During the period of their centuries long suzerainty over the Caucasus, the Sassanids made attempts to promote Zoroastrianism there with considerable successes. It was also prominent in the pre-Christian Caucasus (especially modern-day Azerbaijan).

What Are the Different International Trade Theories?

“Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever seen, housing more than 50,000 people within its six miles of wall. Uruk, its agriculture made prosperous by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediaries…A cooperative trade network…set the pattern that would endure for the next 6,000 years.”Matt Ridley, “Humans: Why They Triumphed,” Wall Street Journal, May 22, 2010, accessed December 20, 2010, http://online.wsj.com/article/SB10001424052748703691804575254533386933138.html.

In more recent centuries, economists have focused on trying to understand and explain these trade patterns. Chapter 1 'Introduction', Section 1.4 'The Globalization Debate' discussed how Thomas Friedman’s flat-world approach segments history into three stages: Globalization 1.0 from 1492 to 1800, 2.0 from 1800 to 2000, and 3.0 from 2000 to the present. In Globalization 1.0, nations dominated global expansion. In Globalization 2.0, multinational companies ascended and pushed global development. Today, technology drives Globalization 3.0.

To better understand how modern global trade has evolved, it’s important to understand how countries traded with one another historically. Over time, economists have developed theories to explain the mechanisms of global trade. The main historical theories are called classical and are from the perspective of a country, or country-based. By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. These theories are referred to as modern and are firm-based or company-based. Both of these categories, classical and modern, consist of several international theories.

Classical or Country-Based Trade Theories

Mercantilism

Developed in the sixteenth century, mercantilismA classical, country-based international trade theory that states that a country’s wealth is determined by its holdings of gold and silver. was one of the earliest efforts to develop an economic theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver. The objective of each country was to have a trade surplusWhen the value of exports is greater than the value of imports., or a situation where the value of exports are greater than the value of imports, and to avoid a trade deficitWhen the value of imports is greater than the value of exports., or a situation where the value of imports is greater than the value of exports.

A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their nations by building larger armies and national institutions. By increasing exports and trade, these rulers were able to amass more gold and wealth for their countries. One way that many of these new nations promoted exports was to impose restrictions on imports. This strategy is called protectionismThe practice of imposing restrictions on imports and protecting domestic industry. and is still used today.

Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. The British colonial empire was one of the more successful examples; it sought to increase its wealth by using raw materials from places ranging from what are now the Americas and India. France, the Netherlands, Portugal, and Spain were also successful in building large colonial empires that generated extensive wealth for their governing nations.

Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports through a form of neo-mercantilism in which the countries promote a combination of protectionist policies and restrictions and domestic-industry subsidies. Nearly every country, at one point or another, has implemented some form of protectionist policy to guard key industries in its economy. While export-oriented companies usually support protectionist policies that favor their industries or firms, other companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who pay more for foreign-made goods or services. Free-trade advocates highlight how free trade benefits all members of the global community, while mercantilism’s protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry.

Absolute Advantage

In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations.Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists. Smith offered a new trade theory called absolute advantageThe ability of a country to produce a good more efficiently than another nation., which focused on the ability of a country to produce a good more efficiently than another nation. Smith reasoned that trade between countries shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should flow naturally according to market forces. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Similarly, if Country B was better at producing another good, it could focus on specialization as well. By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks. Production would also become more efficient, because there would be an incentive to create faster and better production methods to increase the specialization.

Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people.

Comparative Advantage

The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries.

Comparative advantageThe situation in which a country cannot produce a product more efficiently than another country; however, it does produce that product better and more efficiently than it does another good. occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity.

Let’s look at a simplified hypothetical example to illustrate the subtle difference between these principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? No. For every hour Miranda decides to type instead of do legal work, she would be giving up $460 in income. Her productivity and income will be highest if she specializes in the higher-paid legal services and hires the most qualified administrative assistant, who can type fast, although a little slower than Miranda. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher. This is comparative advantage. A person or a country will specialize in doing what they do relatively better. In reality, the world economy is more complex and consists of more than two countries and products. Barriers to trade may exist, and goods must be transported, stored, and distributed. However, this simplistic example demonstrates the basis of the comparative advantage theory.

Heckscher-Ohlin Theory (Factor Proportions Theory)

The theories of Smith and Ricardo didn’t help countries determine which products would give a country an advantage. Both theories assumed that free and open markets would lead countries and producers to determine which goods they could produce more efficiently. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. Their theory is based on a country’s production factors—land, labor, and capital, which provide the funds for investment in plants and equipment. They determined that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply relative to demand would be cheaper; factors in great demand relative to supply would be more expensive. Their theory, also called the factor proportions theoryAlso called the Heckscher-Ohlin theory; the classical, country-based international theory states that countries would gain comparative advantage if they produced and exported goods that required resources or factors that they had in great supply and therefore were cheaper production factors. In contrast, countries would import goods that required resources that were in short supply in their country but were in higher demand., stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand.

For example, China and India are home to cheap, large pools of labor. Hence these countries have become the optimal locations for labor-intensive industries like textiles and garments.

Leontief Paradox

In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US economy closely and noted that the United States was abundant in capital and, therefore, should export more capital-intensive goods. However, his research using actual data showed the opposite: the United States was importing more capital-intensive goods. According to the factor proportions theory, the United States should have been importing labor-intensive goods, but instead it was actually exporting them. His analysis became known as the Leontief ParadoxA paradox identified by Russian economist Wassily W. Leontief that states, in the real world, the reverse of the factor proportions theory exists in some countries. For example, even though a country may be abundant in capital, it may still import more capital-intensive goods. because it was the reverse of what was expected by the factor proportions theory. In subsequent years, economists have noted historically at that point in time, labor in the United States was both available in steady supply and more productive than in many other countries; hence it made sense to export labor-intensive goods. Over the decades, many economists have used theories and data to explain and minimize the impact of the paradox. However, what remains clear is that international trade is complex and is impacted by numerous and often-changing factors. Trade cannot be explained neatly by one single theory, and more importantly, our understanding of international trade theories continues to evolve.

Modern or Firm-Based Trade Theories

In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged after World War II and was developed in large part by business school professors, not economists. The firm-based theories evolved with the growth of the multinational company (MNC). The country-based theories couldn’t adequately address the expansion of either MNCs or intraindustry tradeTrade between two countries of goods produced in the same industry., which refers to trade between two countries of goods produced in the same industry. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany.

Unlike the country-based theories, firm-based theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality, into the understanding of trade flows.

Country Similarity Theory

Swedish economist Steffan Linder developed the country similarity theoryA modern, firm-based international trade theory that explains intraindustry trade by stating that countries with the most similarities in factors such as incomes, consumer habits, market preferences, stage of technology, communications, degree of industrialization, and others will be more likely to engage in trade between countries and intraindustry trade will be common. in 1961, as he tried to explain the concept of intraindustry trade. Linder’s theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences. In this firm-based theory, Linder suggested that companies first produce for domestic consumption. When they explore exporting, the companies often find that markets that look similar to their domestic one, in terms of customer preferences, offer the most potential for success. Linder’s country similarity theory then states that most trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry trade will be common. This theory is often most useful in understanding trade in goods where brand names and product reputations are important factors in the buyers’ decision-making and purchasing processes.

Product Life Cycle Theory

Raymond Vernon, a Harvard Business School professor, developed the product life cycle theoryA modern, firm-based international trade theory that states that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that production of the new product will occur completely in the home country of its innovation. In the 1960s this was a useful theory to explain the manufacturing success of the United States. US manufacturing was the globally dominant producer in many industries after World War II.

It has also been used to describe how the personal computer (PC) went through its product cycle. The PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of manufacturing and production process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world. For example, global companies even conduct research and development in developing markets where highly skilled labor and facilities are usually cheaper. Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms.

Global Strategic Rivalry Theory

Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entryThe obstacles a new firm may face when trying to enter into an industry or new market. refer to the obstacles a new firm may face when trying to enter into an industry or new market. The barriers to entry that corporations may seek to optimize include:

  • research and development,
  • the ownership of intellectual property rights,
  • economies of scale,
  • unique business processes or methods as well as extensive experience in the industry, and
  • the control of resources or favorable access to raw materials.

Porter’s National Competitive Advantage Theory

Chapter 2 The Expansion Of Trade

In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theoryA modern, firm-based international trade theory that states that a nation’s or firm’s competitiveness in an industry depends on the capacity of the industry and firm to innovate and upgrade. In addition to the roles of government and chance, this theory identifies four key determinants of national competitiveneness: (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics. stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.

  1. Local market resources and capabilities (factor conditions). Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage.
  2. Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a sustainable competitive advantage in software products and services.
  3. Local suppliers and complementary industries. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity.
  4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness.

Chapter 2: The Expansion Of Trade Act

In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries.

Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories.