This paper intends to highlight on the significance of international trade for a particular economy. Different trade theories have been included in the paper. Based on the critical discussion, the most relevant trade theory from the perspective of US have been identified in the paper.
The concept of international trade implies that there is exchange of goods and services as well as technology between the countries which in turn contributes to the welfare of the economy. The international trade provides the countries with the scope to expand the market for country’s output beyond the national boundary (Manova, 2013). However the imports within the country bring in goods, services as well as technologies that were unavailable in the host country. There is a need for the countries to participate in the international trade because each country produces different things and the exchange of goods increases the level of resources within the trading partners (Chor and Manova, 2012).
The international trade also raises the GDP of the economy and the trading partners are at a beneficial position with economic growth within the nations (Becker, Chen and Greenberg, 2013). The theory of international trade implies that one countries purchases goods from the other nation at low prices and sells the products at high prices in the other country (Steen-Olsen, et al., 2012). The trade involves the transfer of not only the goods and services but also machinery and equipments within the nations. The paper aims at considering the various trade theories in order to discuss the most relevant trade theory for United States. The paper also allows the scope to understand the significance of different trade theories in the international market.
Trade theories applicable for United States
According to the research there are two resources in the economy of United States that is labour as well as capital which are used in the production of goods and services. However the prices of these resources are affected by the international trade (Ahn, Amiti and Weinstein, 2011). The demand for the products manufactured in United States rises as the prices of the goods falls. Further the country carries out its international trade by importing goods from other countries in order to maintain a trade relationship with the trading partners.
Comparative Advantage Theory
The comparative advantage theory of Ricardo deals with the fact that the countries specialise on particular good and that good it exported to other country in order to earn profit (Bayne and Woolcock, 2011). Further the other trading partner specialises in a good that is imported in order to enhance the production process (Johnson and Noguera, 2012; Kasahara and Lapham, 2013). The research suggests that United States has a comparative advantage in producing vehicular parts, machinery and electrical equipments that are exported to other countries such as Canada. According to the researcher, Canada is considered as the largest trading partner of United States with $632 billion of total goods traded in 2013 (Fowler, 2013).
The trade deficit of U.S goods and services with that of Canada was around $40 million in 2012 (Fowler, 2013; World Bank, 2015b). The figure has increased in the later years and the country exports goods in large quantity in order to earn a huge profit.