HISTORICAL THEORIES
CHAPTER 1: EVOLUTION OF INTERNATIONAL
TRADE
The main historical theories are called classical or
country-based which includes:
INTRODUCTION
The World Trade Organization (WTO) is the
only global international organization dealing with
the rules of trade between nations. At its heart are
the WTO agreements negotiated and signed by the
bulk of the world’s trading nations and ratified in
their parliaments. The goal is to ensure that trade
flows as smoothly, predictably, and freely as possible
and to help producers of goods and services,
exporters, and importers conduct their business.
Roles of WTO:
1. It operates a global system of trade rules.
2. It acts as a forum for negotiating trade
agreements.
3. It settles trade disputes between its members.
4. It supports the needs of developing countries.
WTO functions primarily as the forum for trade
negotiations between countries. The primary
purpose of the WTO is to open trade for the benefit
of all. WTO is the precursor of the General
Agreement on Tariffs and Trade (GATT), which was
established by a multilateral treaty of 23 countries in
1947 after World War II in the wake of other new
multilateral institutions dedicated to international
economic cooperation – such as the World Bank and
the International Monetary Fund.
1.1 EVOLUTION OF INTERNATIONAL TRADE THEORY:
A GLIMPSE
The evolution of the international trade theories
reflects the ways nations were addressing basic
economic problems due to unequal distribution of
natural resources or difference in geographical
locations. Over time, economists have developed
theories to address these economic problems and
explain the mechanisms of international business
and trade.
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Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher-Onin Theories
By mid-twentieth century (1900s-2000s), the
theories began to shift to modem and are called firmbased or company-based which includes:
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Country Similarity
Product Life Cycle
Global Strategic Rivalry
Porter's National Competitive Advantage
Other Theories:
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Liberalism
Professionalism
Free Trade Theory
The Leontief Paradox
Standard Theory of International Trade
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Adam Smith’s Wealth of Nations (1776) and
David Ricardo’s Principles of Economics
(1951) were published.
One of the earliest efforts to develop an
economic theory, the theory is a classical, countrybased international trade theory states that a
country’s wealth is determined by its holdings of
gold and silver.
Theory of Free Trade
The works of Smith and Ricardo herald the
formulation of a theory of free trade. - Smith
considered division of labor, as observed in the
nascent large-scale industries of his homeland
England, as the base for lowering labor costs, which
ensured effective competition across countries.
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Division of labor is the separation of a work
process into a number of tasks, with each
task performed by a separate person or
group of persons to boost productivity and
efficiency and enhance specialization.
Theory of the Price-Specie Flow Mechanism
The possible dilemmas in terms of the need
for monetary adjustments for countries having a
continuous trade surplus with absolute advantage in
all traded goods could be shelved aside by relying on
the automatic adjustment as posited by Smith's
contemporary

David Hume (1776) when he offered the
theory of the price-specie flow mechanism.
Trade surplus is the amount by which the
value of a country's exports exceeds the cost
of its imports.
INDUSTRIAL CAPITALISM
Industrial capitalism in Ricardo's England was
at a relatively advanced stage as compared to what it
was in Smith's time, both with rapid growth of largescale industries and captive markets in overseas
colonies.
It was the second phase of capitalism in
which industries/factories became the dominant
factor in the production of goods. Imports of wage
goods (corn) had a special role by cheapening wage
goods; hence, labor cost.
FREE TRADE VS MERCANTILISM
Free Trade
As opposed to the mercantilist policies of
protection, was championed by both Smith and
Ricardo as a route to achieve production efficiency at
a global level. - In a Free Trade system, individuals
benefit from a greater choice of affordable goods, -
Mercantilism
It restricts imports and reduces the choices
available to consumers. Ricardo's cost calculations,
despite his concerns for the introduction of
machinery on a large scale, were based on labor
hours, which were treated as a single homogeneous
input with production in a two-commodity world,
subject to constant costs.
ABSOLUTE AND COMPARATIVE ADVANTAGE
Absolute Advantage
Absolute advantage is the country's inherent
ability to produce specific goods efficiently and
effectively at a relatively lower marginal cost, lesser
workforce, lesser time, and lesser cost without
compromising the quality.
Comparative Advantage
Comparative advantage refers to the
country's capability to produce the specific goods at
lower marginal cost and opportunity cost compared
to other countries.
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Marginal cost is the cost incurred in
producing an additional unit of product.
Opportunity cost means the value you will
get from an alternative thạt you did not
choose.
STANDARD THEORY OF INTERNATIONAL TRADE
The Theory of International Trade and
Commercial Policy, still considered to be one of the
oldest branches of economic thought, has evolved
from the Standard theory of International Trade.
From the ancient Greeks to the present,
government officials, intellectuals, and economists
have discussed whether trade is beneficial or harmful
to nations, and, more importantly, have tried to
determine what trade policy is best for any particular
country.
1.2 BARTER
Barter
The barter of goods or services among
different people is an age-old system, probably as old
as human history. This system has been practice for
centuries facilitating the exchange of goods and
services before the advent of the monetary system.
Bartering involves a direct trade/exchange
of goods and services. It is the process of trading
services or goods between two parties without using
money in the transaction. It can be:
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There are now swap markets and online
auctions. Even though money is there for trading and
business, the barter system will continue to exist and
become stronger and more organized. There are
numerous websites that offer online bartering
arrangements.
HISTORYPLEX
Historyplex has the following account for the
development of barter through the centuries. The
author had inserted some relevant information in
appropriate time slots in the account:
Early Humans:
service can be exchanged for an item
an item exchanged for a service
an item can be exchanged for some
other item
ADVANTAGE AND DISADVANTAGE OF BARTERING
Advantage of Bartering
The advantage of bartering is that it does not
involve money. It is very simple such that issues
confronted in international trade like foreign
exchange and unbalanced economic power are
virtually nonexistent.
Disadvantage of Bartering
It is difficult to find people who need what
the other people have. Also, in barter, it is difficult to
find the value of what one has versus the value of
what the other one has. There is no standard
measure of value. It is time-consuming.
SWAP MARKETS AND ONLINE AUCTIONS
The invention of money did not put an end
to bartering services. Monetary crises fueled the
revival of this system and the current recession has
once again set a stage for its comeback. With the
advent of more sophisticated techniques that aid
trading through the internet, barter is once more
present in our current times.
They used leaves and animal skin as clothes - ate
vegetables, fruits, fish, and animal meat
Formation of Groups:
The early humans had to travel long distances to find
food. They started forming groups, they stayed
together while traveling and hunting. Intergroup
interaction started and this paved the way for a
system of trading.
Cultivation and Farming:
People began growing plants and raising farm
animals, doing works like pottery, carpentry, and
weaving.
Evolution of the Barter System:
Barter system was introduced by the tribes of
Mesopotamia, was adopted by the Phoenicians, who
bartered their goods to people in other cities located
across the oceans.
An improved system of bartering was developed in
Babylonia. People used to exchange their goods for
weapons, tea, spices, and food items. Sometimes,
even human skulls were used for barter.
1.3 ORIGIN OF MONEY
It is believed that the first recognizable metal coins
appeared in China, during 1000 BC. The earliest
currency of China of the eighth century BC consisted
of miniature hoes and billhooks (pruning
implements), with inscriptions indicating the
authority. Sometime around 770 BC, miniature
replicas of tools and weapons cast in bronze were
used by the Chinese as a medium of exchange. The
small bronze celts (prehistoric tools resembling
chisels) and bronze rings frequently found in hoards
in Western Europe probably played a monetary role.
Even in modern times, such mediums of exchange as
fishhook currency have been known. Due to
impracticality, these tiny daggers, spades, and hoes
were eventually abandoned for objects in the shape
of a circle. These objects became some of the first
coins.
Around 700 BC, the Chinese moved from coins to
paper money. By the time Marco Polo (the Venetian
merchant, explorer, and writer who travelled through
Asia along the Silk Road between AD 1271 and 1295)
visited China in approximately AD 1271, the emperor
of China had a good handle on both the money
supply and various denominations.
Although China was the first country to use coins, the
first region of the world to use an industrial facility to
manufacture coins (a mint) that could be used as
currency was in Europe, in the region called Lydia
(now western Turkey). Minting is the process of
making a coin by stamping metal. In 600 BC, around
the time China started using paper money. Lydia's
King Alyattes minted the first official currency nonstandardized coins from electrum (a naturally
occurring alloy of gold and silver) that did not have a
standardized value. King Croesus (son of King
Alyattes) (reigned 560-546 BC) produced a bimetallic
system of pure gold and pure silver coins. Lydia's
currency helped the country increase both its
internal and external trading systems, making it one
of the richest empires in Asia Minor. Today, when
someone says, "as rich as Croesus," they are referring
to the last Lydian king who minted the first gold coin.
The European colonial governments in North
America issued the first paper currency. Because
shipments between Europe and the North American
colonies took so long, the colonists often ran out of
cash as operations expanded.
According to Adam Shortt, the great Canadian
economic historian, the first regular system of
exchange in Canada involving Europeans occurred in
Tadaoussac in the early seventeenth century, where
French traders bartered each year with the
Mantagnais people (also known as the innu) trading
weapons, cloth, food, silver items, and tobacco for
animal pelts, especially those of the beaver.
Silver and copper coins designed especially for the
colonies was minted in 1670 due to the inability to
keep coins in calculation in French colonies in the
Americas These coins could not be circulated in
France. While apparently intended only for the West
Indies, a small number of these coins are believed to
have circulated in Canada.
In 1685, the colonial authorities in New France found
themselves short of funds. Jacques de Meulles,
Intendant of Justice, Police, and Finance came up
with the temporary issuance of paper money printed
on playing cards. Card money was purely a financial
expedient initially but was later acknowledged as a
medium of exchange. The first issue of card money
occurred on June 8, 1685, and was redeemed three
months later.
The livre (French for "pound" and the name of both
units of account and coins was the currency of the
Kingdom of France and its predecessor state of West
Francia from 1781 to 1794.
Copper coins were introduced in 1722, but they were
not well received by merchants. The government,
once again short of funds, also issued promissory
notes called ordonnances and treasury notes called
acquits, which began to circulate as money in March
1729, card money, which were strictly limited, were
legal tender for all payments and replaced the
ordonnances in circulation. Legal tender means
currency, such as coin and paper money, that is
declared by law to be valid and sufficient for the
payment of debts, and meet a financial obligation,
including tax payments, contracts, and legal fines or
damages.
On October 15, 1759, the French government
suspended payment of bills of exchange drawn on
the Treasury for payments of expenses in Canada
until three months after peace was restored. The
advent of paper money led to an increase in
international trade. Today, physical currency is not
required, as electronic money is widely used for
monetary transactions. In fact, we now have
digital/virtual currencies or cryptocurrencies.
1.4 HISTORY OF THE PHILIPPINE CURRENCY
PRE-HISPANIC ERA
Before the arrival of the Spaniards in the Philippines,
barter was the primary method of trade among early
Filipinos and neighboring countries like China, Java,
Borneo, and Thailand. Without coins or paper
money, people relied on direct exchanges of goods to
obtain what they needed. Additionally, early Filipino
communities often had limited access to resources
and materials, making bartering essential for
obtaining goods that were scarce or unavailable
locally. This system formed the backbone of the early
Filipino economy.
However, the inconvenience of bartering led to the
adoption of cowries, a type of shell, as a form of
currency. Cowries, produced in various materials
including gold, jade, quartz, and wood, became
widely accepted as money over many centuries.
People used gold not only for decorative purposes
but also as a means of trade. Since the Philippines is
naturally rich in gold, barter rings made in gold were
used for personal adornment and as the first local
form of coinage, known as Piloncitos. These coins
featured an embossed inscription with a Baybayin
“Ma” or “M” character believed to represent the
name by which the Philippines was known to Chinese
traders during the pre-Spanish era.
SPANISH ERA (1521-1897)
When the Spaniards arrived in the Philippines, our
ancestors were already trading with countries like
China, Japan, India, and others. The Spanish
government continued this trade, and Manila
became a big center for business in Asia. The Spanish
only allowed trade with Mexico, and Manila became
the main port for trading goods. The Spanish ruled
the Philippines for 300 years. They brought silver
coins called "cobs" or "macuquinas" from Mexico
and other Spanish colonies on large, sturdy sailing
ships called galleons.
The term "barya" originated from the Spanish word
"barilla," which referred to a crude bronze or copper
coin. These coins were issued by the Spanish Empire
to address the shortage of small denomination coins,
also known as fractional coins. The Spanish
government introduced barillas as a solution to the
problem of having insufficient small coins for
everyday transactions. Over time, the term "barilla"
evolved into "barya" in the local Filipino language.
Therefore, when Filipinos use the term "barya" to
refer to small coins, they are unknowingly using a
word derived from Spanish colonial history.
In Manila, gold coins featuring the portrait of Queen
Isabela were minted. These coins served as a form of
currency and were used for trade and transactions.
Meanwhile, in Spain, the last coins to be minted
before the transition to paper money were silver
pesos bearing the profile of young Alfonso XIII.
Additionally, the Philippines saw the introduction of
paper money through the issuance of pesos fuertes
by the country's first bank, El Banco Espanol Filipino
de Isabel II. This marked the transition from
traditional metal coins to paper currency in the
Philippines, with the pesos fuertes becoming the first
paper money circulated in the country.
REVOLUTIONARY PERIOD (1898-1899)
In 1898, during the period of the Philippine Republic
under General Emilio Aguinaldo, the country
asserted its independence by issuing its own coins
and paper currency. These coins and notes were
backed by the Philippines' natural resources,
symbolizing the nation's sovereignty. At the Malolos
arsenal, two types of two-centavo copper coins were
struck. One-peso and five-peso revolutionary notese
printed as Republika Filipina Papel Moneda de Un
Peso and Cinco Pesos were freely circulated. These
notes were hand-signed by prominent figures such as
Pedro Paterno, Mariano Limjap, and Telesforo
Chuidian, further affirming the legitimacy of the
Philippine Republic's currency.
AMERICAN PERIOD (1900-1941)
THE PHILIPPINE REPUBLIC
With the arrival of the Americans in 1898, the
Philippines underwent significant changes in its
banking, currency, and credit systems, leading to
prosperity and modernization. The history of money
in the Philippines took a progressive direction when
the country was under American rule. One of the
milestones in this era was the passing of the
Philippine Coinage Act of 1903. This established a
monetary system based on a theoretical gold peso at
the ratio of ₱2 to $1.
The establishment of the Central Bank of the
Philippines in 1949 marked a significant milestone,
leading to the issuance of the first currencies known
as the English series notes, printed by Thomas de la
Rue & Co., Ltd. in England, and coins minted at the
US Bureau of Mint.
Under this system, coins featuring designs by Filipino
engraver and artist Melecio Figueroa were minted,
ranging from denominations of one-half centavo to
one peso. In 1912, El Banco Español Filipino was
renamed Bank of the Philippine Islands or BPI. It
marked a shift from Spanish to English language
usage in all notes and coins issued until 1933.
Treasury certificates replaced the silver certificates
series starting in May 1918, with the addition of a
one-peso note to the currency.
JAPANESE OCCUPATION (1942-1945)
During World War II, the Philippine monetary system
experienced significant disruptions. Two types of
notes circulated in the country during this
tumultuous period. First, the Japanese Occupation
Forces issued war notes in high denominations.
These notes, commonly referred to as "Mickey
Mouse" money by Filipinos, lacked backing reserves,
rendering them practically worthless. This led to
rampant inflation, with prices skyrocketing to
unprecedented levels. Filipinos would carry bundles
of these war notes in "bayongs" (traditional woven
bags) to the market, where even basic items like a
single duck egg would cost 75 pesos, and a box of
matches could fetch over 100 pesos. Guerrilla notes
or resistance currencies were issued by various
provinces and municipalities as a form of defiance
against Japanese occupation. These notes were
typically issued in low denominations and served as
symbols of resistance and solidarity among Filipinos.
These "guerrilla pesos" were printed by local
government units and banks using crude inks and
materials.
The "Filipinization" of the republic's coins and notes
began in the late 60s and continued into the present.
In the 70s, the Ang Bagong Lipunan (ABL) series
notes were circulated, printed at the Security
Printing Plant from 1978 onwards, in which the
highest denomination was ₱2. The Philippine coinage
system saw a new wave of change with the Flora and
Fauna coin series issued in 1983. Subsequently, the
New Design Series of banknotes replaced the ABL
series in 1985. It was also known as the BSP Series
when the Bangko Sentral ng Pilipinas was established
in 1993.
Ten years later, a new set of coins and notes bearing
the logo of the new Bangko Sentral ng Pilipinas
(Central Bank of the Philippines) were issued. It is
called the New Generation Currency (NGC) Series
issued on December 16, 2010.
1.5 MOBILE PAYMENTS AND INTERNET
MOBILE PAYMENTS
Mobile Payments are money rendered for a product
or service through a portable electronic device such
as a cell phone.
POINT OF SALE (POS)
POS is a place, such as a checkout of a store, where
customer makes the payment for goods or services.
NEAR FIELD COMMUNICATION (NFC)
NFC is the technology that allows two devices – your
phone and a payment’s terminal – to process
contactless payments using close-proximity radio
frequency identification.
SOUND WAVE-BASED (SWB)
INTERNET PAYMENTS
Sound Wave-Based (SWB) or Sound Signal-Based
(SSB) uses advanced, ultra-low power, wireless
transmission technology to transmit data via sound
waves.
It can be done on desktops, laptops or even phones.
MAGNETIC SECURE TRANSMISSION (MST)
MST is when a phone emits a magnetic signal
imitating the magnetic strip on the player’s credit
card, which the card terminal picks up and processes
as if a physical card was swiped through a machine.
MOBILE / DIGITAL WALLET
Stores payment information on a mobile device,
usually an app that utilizes different technologies in
the payment process.
QUICK RESPONSE (QR)
Trademark of a type of “matrix barcode” (type 2d
barcode) readable by smartphones.
It has 4 important advantages:
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It stores large volume of date
It can be scanned from a screen, not just a
paper
It can be read even if part of the code is
damaged
It can be safer because information can be
encrypted
WIRELESS APPLICATION PROTOCOL (WAP)
It is used to be the most common facility o
smartphone through a more limited-capacity WAP
browser or app.
PAYMENTS LINKS OR PAY-BY-LINK
Most commonly referring to a button / link sent in an
email, text message, messaging app, or over social
media where a checkout page opens up in an internet
browser.
NEO-BANKS
A term to umbrella or refer to new, cutting edge
generation of banking.
1.6 VIRTUAL CURRENCY
VIRTUAL CURRENCY
Cryptocurrency is a volatile investment wherein it
may gradually increase or decrease. And also, you
can use it for online transactions, and other countries
are using crypto as a payment for their goods and
services. Lastly, you can withdraw your investments
whenever you want.
FIAT MONEY
SHORT MESSAGE (OR MESSAGING) SERVICE (ALSO
CALLED PREMIUM SMS PAYMENTS)
Fiat money is a real money, it is the money we use for
our daily transactions in any market or whenever we
avail goods and services.
Paying for products or services via text message with
relevant information to the right payee, phone
number and the payment amount.
E-MONEY
DIRECT CARRIER BILLING (DCB)
DCB s similar to SMS payments because you pay
through your mobile carrier instead of using bank or
card details, the payment will then be added to your
phone bill or prepaid.
E-money is an electronic wallet where you can store
your cash and do online transactions and can save
money.
VIRTUAL CURRENCY EXCHANGE
It allows users to withdraw their investment from
crypto to different currencies.
BLOCKCHAIN TECHNOLOGY
DOGECOIN
Blockchain is a kind of database that store the
transactions of different types of cryptocurrencies,
and store the data of the users.
Dogecoin was made for a payment system as a joke,
it was the first dogecoin, but some companies are
accepting dogecoins as payment. But now dogecoin
is no joke, it can use for investment.
DECENTRALIZED AND CENTRALIZED
Decentralized are conducted by the sole users while
the Centralized has a system with which transactions
are done usually by a central entity of authority.
Top six 5-star rated digital currencies today as ranked
by Louis Navellier:
ETHEREUM
Ethereum is a decentralized cryptocurrency and it is
second popular investment in cryptocurrency. Also, it
started with the amount of $0.13, and now is
$2,667.47
CHAPTER 2: CLASSICAL COUNTRY-BASED THEORIES
OF INTERNATIONAL TRADE
2.1 INTERNATIONAL TRADE THEORIES
TRADE
Trade is the concept of exchanging goods and
services between two people or entities
INTERNATIONAL TRADE
International trade is the concept of this exchange
between people or entitles in two different
countries.
BITCOIN
INTERNATIONAL TRADE THEORIES
Bitcoin was established in the year 2009, that time
the price of bitcoin is $0.0009. There are other
countries that are accepting bitcoin as a payment for
their goods and services.
RIPPLE
Ripple can help investors to transact in any banks, but
this coin is not good when it comes to investment
because of its high volatile price.
International trade theories are various theories that
analyze and explain the patterns and mechanisms of
international trade. They deal with how countries
exchange goods and services and help countries in
deciding what should be exported and what should
be imported
According to Reyes (2012), the main points of the
classical theories of international trade are the
following:
STELLAR
Stellar is a decentralized platform, it offers low cost,
cross border transactions.
CARDAN (ADA)
Cardan is a decentralized blockchain platform and it
can do transactions in its internal cryptocurrency.
And also it is a digital coin that used to store value or
send and receive funds.
1. Trade is an important stimulator of economic
growth
2. Trade tends to promote greater international and
domestic equality
3. Trade helps countries to achieve development
4. In a world of free trade, international prices and
costs of productions determine how much a
country should trade in order to maximize its
national welfare.
5. In order to promote growth and development, an
outward-looking international policy is required
In the mid-twentieth century, economists shifted
from country-based to firm-based or companybased theories, which were called modern theories.
These theories are useful and can help with
international trade by helping a business determine
the right country to expand into and make goods
more efficiently than other firms.
2.2 MERCANTILISM
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Mercantilists believed that a country should
increase its holdings of gold and silver by
promoting exports and discouraging
imports.
Trade surplus – a situation where the value
of exports is greater than the value of
imports
Trade deficit – a situation where the value of
imports is greater than the value of exports
COMMERCIAL REVOLUTION
David Hume (1711-1776)
The Commercial Revolution which took place
between 1450 and 1750 (300 years) brought a
revolutionary change in the economy of Europe.
Modelled the price-specie-flow mechanism to
illustrate how trade imbalances can self-correct and
adjust under the gold standard.
Basic Features of the Commercial Revolution
Local economics – National economies
The Price Specie Flow Mechanism is a theory that
explains the constant fluctuation of prices in the
stock market based on the flow of capital in and out.
Feudalism – Capitalism
History of Mercantilism
Rudimentary trade – Globally larger international
trade
From 1500s to the late 1800s helps explain why
mercantilism flourished o The 1500s marked the rise
of new nation-states, whose rulers wanted to
strengthen their nations
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Feudalism was a system in which people
were given land and protection by people of
higher rank, and worked and fought for them
in return.
Capitalism refers to an economic system in
which a society's means of production are
held by private individuals or organizations,
not the government, and where products,
prices, and the distribution of goods are
determined mainly by competition in a free
market.
MERCANTILISM
The commercial revolution gave birth to
mercantilism, which played a vital role for the
economic prosperity of a nation and created a
milestone in the European Economy.
Developed in the sixteenth century, mercantilism
was one of the earliest efforts to develop an
economic theory.
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These rulers placed lots of importance on the
development of merchants (a person who
buys or sells goods in large quantities,
especially one who imports and exports
them) and naval fleets (a large formation of
warships) which would facilitate exports.
Free-trade

Advocates highlight how free trade benefits
all members of the global community, while
mercantilism’s protectionist policies only
benefit select industries.
Soon colonization followed and these nation-states
expanded their wealth by using their colonies
around the world in an effort to control more trade
and amass more riches.
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During those times, precious metals,
particularly gold and silver were considered
indispensable(essential) to a nation’s wealth
as a country’s wealth determined by the
amount of gold and silver that it holds.
Adam Smith coined the term “mercantile system”

Mercantilism was also known as “bullionism” ∙

Bullion means large amounts of gold and
silver.
Adam Smith described mercantilism as having the
following characteristics:
1. It was used to enhance the economic power of
states through building wealth, an important
measure of which was precious metals,
especially silver and gold.
2. It led to massive and rapid unification of control
(protectionism) of countries
under strict
economic and political policies, in sharp contrast
with what observed under feudalism resulting in
economic nationalism.
3. The countries aggressively sought to have a
favorable balance of trade (trade surplus) by
selling more than they imported so as to have a
surplus of precious metals and accumulate it
over time.
In Mercantilism, the government strengthens the
private owners of the factors of production, which
are:
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Labor – refers to the work performed by a
person for a monetary consideration.
Natural Resources (land) - are those find in
nature including land, trees, mines are
natural resources and a major factor of
production.
Capital goods (capital) – refers to the money
used to purchase goods used in the
production process.
Entrepreneurship – is the one that combines
the factors in the correct proportion and
mobilizes them.
Free Trade
Free trade is when international trade is free from
barriers, such as tariffs, quotas, or other restrictions,
and can flourish on its natural growth.

Smith illustrated that a freely conducted
trade was much better than mercantile
doctrine.
Laissez-faire- means “leave them alone” or
“let it be”
Adam Smith’s Division of Labor
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Division of labor
Specialization
Productivity
Economies scale
Efficiency
Sustainable growth
Jean-Baptiste Colbert (1619-1683)
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A French statesman who served as
Comptroller General of Finance (1665-1683).
And secretary of state for the Navy (16681683) under King Louis XIV of France.
Was considered as a more profound
influence on the development of
mercantilism in France in France, where it
was known as "Colbertism".
He also emphasized the importance of
money.
Merchant fleets

Played an important role in the international
market so the French government
established marine merchant fleets that
would aid in exportation making the whole
process more efficient.
Sir Willian Petty (1623-1687)
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Was an english economist, physician,
scientist, and philosopher.
He was a supporter of Oliger Cromwell's
government of England.
According to Petty, surplus gain and surplus
value leads to the expanded reproduction.
Expanded reproduction

Is a model in which a capitalist economy
smoothly reproduces itself, a system
founded on capital accumulation, that is, the
expansion of productive capital.
Philipp Wilheim Von Hornick
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Physiocrats

The Austrian lawyer and scholar.
Was a German civil servant, who was one of
the founders of Cameralism and a supporter
of the economic theory of mercantilism.
Sir Thomas Mun (1571-1641)
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Published a book titled A Tract Politucal
Economy in which he laid great emphasis on
development of agriculture and described it
as the basis of al wealth.
He stood for the principle of self-sufficiency
and asserted that it is not the abundance of
gold and silver.
Richard Cantillon
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Is an eighteenth-century group of French
economists who believed that agriculture
was the source of all wealth and that
agricultural products should be highly
priced. Advocating adherence to a supposed
natural order of social institutions, they also
stressed the necessity of free trade.
Giovanni Botero and Antonio Serra
A famous economic thinker, was most closely
associated with the idea of mercantilism in
England where mercantilism was called
commercial system or mercantile system.
Sir Mun was the director of the East India
company.
When Thomas Mun first introduced his idea
of foreign trade, it was during a time of an
economic downfall in England.
Antoine De Montchretien

He was involved in John Law's Mississippi
Bubble, one of the grandest attempts to
actualize the mercantilist dream of of
increasing the supply of money.
A French scholar is considered by many to be
the first economic theorist.
His contributions span such diverse topics as
methodology, value and price
theory,
population, money, international trade,
business cycles, and the circular flow model
of the economy.
He emphasized the need of importing raw
materials and exporting finished products to
maintain a favorable balance of trade.

Giovanni Botero and Antonio Serra of Italy
did not directly touch on mercantilism, but
developed theories using the city as a unit of
analysis and finding development to be
result of human industrial potpourri.
2.3 THEORY OF ABSOLUTE ADVANTAGE
ABSOLUTE ADVANTAGE
Absolute Advantage means a producer, which could
be a person, a group, a company, or a country, can
produce a good or service better, faster, more
efficiently, at a greater volume, and with fewer
resources than others.
MARGINAL COST
It is the cost incurred in producing an additional unit
of a product.
Adam Smith is recognized as the founder of modern
economics, hence, considered as the father of
economics. He is created with using the word
mercantilism first and that his book, The Wealth of
Nations, marked the birth of modern capitalism.
CAPITALISM
Capitalism also called free market economy or free
enterprise economy, is an economic system, where
most means of production are privately owned and
production is guided and income distributed largely
through the operation of markets, which determine
prices product and service rather than the
government.
MODERN CAPITALISM
Modern capitalism emerged as a result of the
appearance of the physiocrats in France.
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The Physiocrats were a group of economists
who believe that the wealth of nations was
derived solely from agriculture.
The term Physiocracy itself introduced by
Dupont de Nemours 1767 literally translate
to the rule of nature
Physiocracy is the first well-developed
theory of economics, which began with the
publication of Adam Smith’s “The Wealth of
Nations in 1776”
The cornerstone of the physiocratic doctrine
was Francois Quesnays (1759- 1766) axiom
that only agriculture yielded a surplus
NET PRODUCT
A measure of the income generated in a production
process, is the value of outputs minus the value of
inputs
Like the Physiocrats, Smith recommended living
economic decision to the free play of self regulating
market forces a more effective natural economic
order in which the government's involvement would
be strictly limited.
Smith did not believe that industry was unproductive
and that only the agriculture sector was capable of
producing a surplus above the subsistence level.
Smith saw that division of labor and extension of
markets created almost limitless possibilities for
society to expand its wealth through production and
trade.
THEORY OF ABSOLUTE ADVANTAGE
The theory of absolute advantage believes that
countries should produce and export such products
which they have an absolute advantage on and
import those goods that they produce relatively less
efficiently and at a higher cost.
Smith explains the benefits of free trade in the global
market using the idea of absolute advantage.
According to his theory, countries with a complete
advantage in a variety of commodities would benefit
simultaneously from imports and exports, increasing
the
significance of unrestricted international
commerce within the framework of the global
economy.
According to Smith, free trade promote international
division of labor through specialization in the
production exchange of such commodities in case of
which they command some absolute advantage.
Vent surplus doctrine states that a nation can
exchange its overproduction for other goods which
are in demand in other countries, which will result in
the fullest utilization of the idle productive capacity.
Smith also mentioned an additional beneficial aspect
of international trade it transfers knowledge and
technology between different nations. The adoption
and use of new production techniques lead to
productivity growth and thus, to an increase in
wealth and economic development.
2.4 THEORY OF COMPARATIVE ADVANTAGE
COMPARATIVE ADVANTAGE
Country's capability to produce specific goods or
manufacture multiple types of goods with limited
resources at a lower marginal cost and opportunity
cost compared to other countries.
At comparative advantage we are looking for a total
cost.
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
Marginal Cost
Opportunity Cost
David Ricardo
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
English
economist
and
successful
stockbroker.
Introduced the theory of comparative
advantage in 1817.
Produce products better and efficiently.
Subtle
Adam Smith was among the first to put in
writing the theory of comparative
advantage. (Economic discussion).
On the Principles of Political Economy and
Taxation.
Smith and Ricardo’s Theory
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Free trade
Specialization
Division of Labor
Lowering labor costs
Industrial Capitalism
Theory of Monetarism


Increases in money supply created inflation
in England 1809.
Practice of controlling the supply of money
to stabilize the economy.
Law of Diminishing Marginal Returns


Essential concepts in microeconomics.
There is a point in production where the
increase is no longer worth the additional
input.
2.5 HECKSCHER-OHLIN THEORY (H-O THEORY)
Bertil Ohlin (1899-1979)
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
On the basis of work by his teacher, the
Swedish economist Eli Filip Heckscher (18791952) from Stockholm School of Economics,
in the 1920s, developed the theory known
as the Heckscher-Ohlin theory (H-O theory).
He was awarded the Nobel Prize for
Economics in 1977
HECKSCHER-OHLIN THEORY
Also known as the resources and trade theory
explains why countries trade goods and services with
each other, the emphasis being on the difference of
resources between two countries. A country rich in
a particular resource than another country tends to
produce more products that use that resource.
Countries are more efficient in producing goods using
such abundant resource.
According to the Heckscher-Ohlin theory, trade
makes it possible for each country to specialize. Each
country exports the product the country is most
suited to produce in exchange for products it is less
suited to produce. Their theory, the Heckscher-Ohlin
theory or H-O theory is based on a country’s
production factors-land, labor, and capital- which
provide the funds for investment in plants and
equipment; hence, the theory is also called the factor
proportions theory.
Hecksher and Ohlin also 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. This
model shows that the comparative advantage is
actually influenced by the interaction between the
resources countries have
and production
technology.
CHAPTER 3: MODERN FIRM-BASED THEORIES OF
INTERNATIONAL TRADE
3.1 PORTER’S NATIONAL COMPETITIVE ADVANTAGE
COMPETITIVE ADVANTAGE
Competitive advantage refers to the ability of the
country or company to offer greater value to
customers, either by means of lower prices, or
offering more benefits and services at the same
price. It puts a country or company in a favorable or
superior business position than its competitors. This
means that absolute advantage and comparative
advantage combine to attain competitive advantage.
Michael Porter
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He developed a new model to explain
national competitive advantage in 1990. It
analyzed why some nations are more
competitive than others and why some
industries within nations are more
competitive than on others in the home
front.
In his book titled Competitive Advantage of
Nations or known as Porter’s Diamond, it
suggests that the national home base of an
organization plays an important role in
shaping the extent to which a country is like
to achieve competitive advantage on a global
scale.
Porter’s theory stated that a nation’s
competitiveness in an industry depends on
the capacity of the industry to innovate and
upgrade.
Four stages of development identified by Michael
Porter:
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Development based on (production) factors This stage focuses on utilizing basic factors of
production such as land, labor, and capital to
compete globally and achieve economic
development.
Development based on investments (capital)
- a country's wealth and ability to invest in
infrastructure, technology, and human
capital play a crucial role in global
competitiveness.
Development
based
on
innovation
(creativity) - Innovation becomes a key driver
of development in this stage, as countries
focus on generating new ideas, products,
and processes to gain a competitive edge.
Development
based
on
prosperity
(economic growth and development) - This
final stage represents a culmination of the
previous stages, where a country achieves
sustained economic growth, high living
standards, and overall prosperity.
FOUR DETERMINANTS:
1. Local market resources and capabilities
Porter recognized the value of the factor proportions
theory or the H-O theory which considers a nations
resources as key factors in determining what
products a country will export or import.
Porter added to these basic factors a new list of
advance factors:
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
Human resources, including skilled labor
Material resources, including national
resources, vegetation, space and the like
 Investments in education, including
knowledge and research in universities
 Technology
 Infrastructure
2. Local market demand conditions
Porter believed that a creative domestic market is
critical to ensuring ongoing innovation, thereby
creating a sustainable competitive advantage.
Companies whose domestic markets are innovative,
trendsetting, and sophisticated will pursue the
development of new products and technologies.
Demanding consumers force companies to
continuously innovate, thus creating a sustainable
competitive advantage in their respective industries
3. Local supplies and Complementary Industries To
remain competitive, large global firms benefit
from having strong and efficient supporting and
related industries to provide the inputs required
by the industry. To be competitive, firms must
have an efficient and strong support network.
4. Local firm characteristics
Local firm characteristics include firm strategy,
industry structure, and industry rivalry. The
strategies help in setting new goals, the structure
helps in managing operation, and rivalry helps in
generating innovation.
In addition to the aforementioned four
determinants, Porter also noted that government
and
chance play a part in the national
competitiveness of industries. Government can, by
their
actions and policies, increase the
competitiveness of firms and occasionally entire
industries. And there is a chance, if a country takes
opportunities of chances open to them, they become
more competitive.
3.2 COUNTRY SIMILARITY THEORY
Traditional trade theories focus on differences
between countries in terms of their resources,
demand, and supply conditions. They suggest that
these differences are necessary for countries to
engage in trade with each other.
However, the Country Similarity Theory, developed
by Swedish economist Stettan Linder in 1961, takes
a different approach. It suggests that countries with
similar levels of development are more likely to trade
with each other because they share similar
preferences and needs.
TWO TYPES OF TRADE
1. Inter-Industry Trade
Inter-industry trade involves the exchange of goods
and services between countries that are produced in
different industries. This means that one country
exports products from one industry in exchange for
products from a different industry from another
country.
2. Intra-Industry Trade
Intra-industry trade, on the other hand, involves the
exchange of goods and services within the same
industry between countries. This means that both
countries are producing similar goods or services
within a particular industry and engaging in trade
with each other.
Six Dimensions of Geert-Hofstede Model
Power Distance

Is the power in the country distributed
unequally?
Individualism

It is the degree of interdependence of the
members of a society.
Masculinity

It is the want to be the best versus liking
what you do (feminine)
Uncertainty Avoidance

Are members of a society feeling threatened
by unknown situations?
Long-term orientation

The society has links with the past and deals
with the challenges of the present and the
future
Indulgence

Do members of a society control their
impulses and desires?C
3.3 PRODUCT LIFE CYCLE THEORY
Life cycle is the series or stages through which a living
thing passes from the beginning of its life until its
death. Despite the fact that the product is not a living
thing, it still has a life cycle. A product life cycle refers
to the length of time a product is introduced in the
market until it is removed from the shelves. Basically,
it is the stages a product goes through from the its
introduction to removal in the market.
In 1966, Raymond Vernon developed a marketing
strategy to help companies plan out the progress of
their new products, known as the product life cycle
theory. By understanding how the products evolve
through stages, it can help them make strategic
decisions that will maximize the products success.
Under this theory, the product life cycle has four
stages: introduction, growth, maturity, and decline
stage.
PRODUCT LIFE CYCLE MANAGEMENT PLAN (PLM)
It is the process of managing product’s life cycle from
inception, through design and manufacturing, to sale
service, and eventually to retirement. In a nutshell,
PLM is the management of a product life cycle from
its creation to its discontinuation.
Product Life Cycle Stages
1. Introduction
The main objective at this stage is to create product
awareness and brand recognition not profits. A
sudden increase of sales is not expected since the
product is newly introduce to the market and there
is a high production, distribution, and promotion
cost.
There is a less competition during this phase as the
product is not yet widely known. There are two price
setting strategies at this stage: price skimming and
price penetration. Price skimming is a price strategy
where the company initially set a high price and
gradually reducing the price as the market grows. On
the other hand, price penetration is when a
company initially set a low price to penetrate the
market and capture market share, before increasing
prices in relation to market growth.
the competitors. During this phase, price wars and
sales promotion is common. There are competitors
that cannot keep up with the strong competition, so
they exit. While the strongest competitors remain to
saturate and dominated the stable market. The
biggest challenge at this stage is to maintain
profitability and preventing sales from further
decline.
Saturation is a challenge in the maturity stage.
Market saturation happens when a specific market
no longer demands a product or service or when the
entire market has no new demand. It doesn’t
specifically mean that the product is no longer in
demand, it just means that the demand for the
product has been largely met by the available supply,
which also limits product’s further growth.
4. Decline
2. Growth
At decline stage, the sales continue to drop and no
amount of marketing or promotion can prevent the
sales figures from dropping. There are a lot of
reasons behind it. Firstly the customer has no longer
interested in older product. Secondly, the
competitors surpassed the product in either features
or price. Thirdly, the customers found a better
substitute. Lastly, when the product is no longer
relevant. During this phase the sales gradually
decrease until it reach the point where the
production cost is higher than the profit.
At this stage, the demand for the product increase,
which also lead to the increase of sales. Profitability
reaches the highest level. Also, the economies of
scale are in order meaning the increase of sales
revenue is faster than the increase of production
cost. During this phase, the competition become
fierce since there are more competitors that tries to
offer the same or similar products.
There are strategies that can be employed in the
decline stage, some of these are: milking or
harvesting, slowly reducing channels and pulling the
product from underperforming geographic areas,
and selling the product to a niche operator or
subcontractor. If the sales or profit continues to
drop, the companies either remove the product or
limits the expenditures made on the product.
3. Maturity.
3.3 GLOBAL STRATEGIC RIVALRY THEORY
At this stage, the sales continues in a decreasing
pattern meaning the sales continue in a slower rate.
After it reached the selling point, the sales curve
likely to decrease. The competition become more
intense as the product become more popular.
Products may undergo changes to stand out from
Global strategic rivalry theory was forwarded in 1980
by economists Paul Krugman and Kelvin Lancaster.
The theory focused on multinational corporations
(MNCs) and how they get a competitive advantage
over other firms in their industry. Firms encounter
global competition in their industries and in order to
prosper, they must develop competitive advantages.
The theory focuses, however, on planned decisions
that firms implement as they participate globally.
These decisions Influence both international trade
and international investment.
There are barriers to entry for a particular Industry
and these barriers to entry are the exact ways for a
company to have a competitive advantage. Barriers
to entry refer to the obstacles a new firm may face
when trying to enter into an industry or a new market
and these barriers to entry are the exact means by
which companies can gain competitive advantage.
These barriers to entry are the following:
RESEARCH AND DEVELOPMENT
Research and development (R&D) are activities
engaged in by companies for the invention of new
products or services to remain competitive. Studies
have found that every dollar invested in R&D
generates nearly two dollars in return While the rate
will vary, R&D is an important driver of economic
growth. To seize this potential, governments need
reliable and precise data. In response, the UNESCO
Institute for Statistics (UIS) produces a wide range of
indicators on the human and financial resources
invested in R&D for countries at all stages of
development (uis.unesco.org 2021). Companies
have their own R&D departments to be able to
actually gain competitive advantage.
OWNING INTELLECTUAL PROPERTY
An intellectual property refers to creations of the
mind, a work or Invention that is the result of
creativity, such as a manuscript (book) or a design, to
which one has rights and for which one may apply
for a patent, copyright trademark, brand name, and
the like.
A patent is an exclusive right granted for a new,
inventive, and useful product. It can take the form of
a new product, process, or technical improvement to
an existing invention. A patent may be used for
licensing.
Copyright is the exclusive legal right to reproduce,
publish, sell, or distribute the matter and form of
something (such as a literary, musical, or artistic
work).
A trademark/brand name is a word, a group of
words, sign, symbol, or a logo that oistinguishes your
business goods or services from those of other
traders. Brand names and trademarks are used for
franchising.
ECONOMIES OF SCALE
Economies of scale means a proportionate saving in
costs (cost advantage) gained by an increased
volume of production. The cost advantage is a result
of spreading the total fixed overhead cost among a
greater number of units produced, which, therefore,
reduces the unit fixed cost for the product. This also
results in a lower average variable cost for the
product. Overall, operational
efficiencies and
synergies are attained. There are two economies of
scale:
a. Internal Economies of Scale - refers to economies
that are unique to a firm. For instance, a firm may
hold a patent over a mass production machine, which
allows it to lower its average cost of production more
than other firms in the industry.
b. External Economies of Scale refers to economies
of scale enjoyed by an entire industry. If studies
indicate that cotton production will need 1,000
workers to be able to enter a trade with a foreign
country, all those engaged in cotton production will
try their best to employ 1,000 workers to become
competitively advantaged.
EXPLOITING THE EXPERIENCE CURVE
Experience produces competitive advantage over
those without experience In any
endeavor.
Therefore, experience will also count in engaging in
international trade, as those with experience
become more conversant with what is going on in the
global trade arena. Employing
experienced
employees is equally advantageous for firms.
Connecting the different barriers, we can say that
experienced innovative firms which own intellectual
property rights to innovative technology pursued
through aggressive research and development will
lead to economies of scale leading to success in
international competition abroad.
CHAPTER 4: OTHER THEORIES OF INTERNATIONAL
TRADE
There are at least two reasons why trade has an
Important influence upon the income distribution:
1. Resources cannot be transferred immediately
and without costs from one industry to another.
2. Industries use different factors and a change in
the production mix a country offers will reduce
the demand for some of the production factors
whereas for others, it will increase the demand
for such production factors.
4.1 THE SPECIFIC FACTOR MODEL
FACTOR OF PRODUCTION
REAL INCOME



It is simply inflation-adjusted income.
Real income measures the amount of
disposable income available to consumers.
Real income represents purchasing power.
Therefore, real incomes are closely linked to
market conditions as they are an important
factor that affects market demand.
A factor of production is any resource that is used by
firms to produce goods and services.
Jones and Samuelson were saying that firstly, it is
hard to move resources from one country to another
without incurring any cost since the factors of
production are generally innate to a country.
Secondly, production of a particular product requires
different factors of production.
GROSS NATIONAL INCOME (GNI)



It is the sum of the value added by all the
goods and services produced within a
particular country, including foreign
investment, to which are added any product
taxes (excluding subsidies), and the value
earned by the nation through overseas
ventures.
When the national income goes down,
demand for nonessential goods go down, as
well.
As Ronald Jones and Paul Samuelson studied,
countries rich in capital will mean an increase
in marginal productivity from the
manufacturing sector, while an increase in
territory will increase the production of food.
And depending on the global demand for
either food or manufactured goods, income
distribution will follow suit.
Hence, most countries would produce those
products for which it has abundant factors of
production.
International business and trade have strong effects
on the distribution of income because different
countries have different factors of production
available to them. If they are rich in a particular
resource needed for the production of a certain
product that is in high demand internationally, that
country will derive a higher income from trade by
exporting such product.
SPECIFIC FACTOR MODEL
It was originally advanced by Jacob Viner, and it is a
variant of the Ricardian Model.
Sometimes referred as the Ricardo-Viner model, and
was later developed and formalized mathematically
by Ronald Jones and Paul Samuelson, two American
economists, who elaborated the SF model based on
specific factors – territory or terrain, labor, and
capital.
When labor moves from food to manufactured
product, food production falls while output of the
manufactured product rises. The shape of the
production function reflects the law of diminishing
marginal returns.
The size of purchases made by the consumers
influences prices. The size of global demand changes
the level of prices inversely, when global demand
rise, prices go down; when global demand goes
down, prices rise.
4.2 STANDARD MODEL OF TRADE
The supply curve represents the relationship
between price and quantity supplied, with all other
factors affecting supply held constant.
GLOBAL DEMAND
Global demand is the key category in
macroeconomics. It refers to amount of money,
which subjects of an economy plan to spend on
goods and services at the different size of income or
at given prices in a given period.
Expense by type
1. Personal Consumption Expenditures
 Symbolized by C - Consumption
2. Gross Private Domestic Investment
 Symbolized by I - Investment
3. Gross Government Spending
 Symbolized by G – Government spending
4. Net Exports
 Symbolized by NX – Net export
STANDARD TRADE MODEL
The Standard Trade model is a general model that
includes the Ricardian model, the Ronald Jones and
Paul Samuelson specific factor model, and the
Heckscher-Ohlin model as special cases. Each
country’s production possibility frontier is a smooth
curve.
A country’s PPF determines its relative supply
function because it shows what the country is
capable of producing, which should be maximized.
National relative supply function determines the
world relative supply function, which along with
world relative demand determines the equilibrium
under international trade.
NET EXPORTS
Net exports are a measure of a nation’s total trade.

The slope of an isovalue line equals PC/PF. The best
point to produce PPF is tangent to the isovalue line,
a line of slope equal to the relative prices.
Net exports = Total exports – Total imports
WORLD RELATIVE SUPPLY CURVE
MARKET EQUILIBRIUM
The intersection of the global demand curve and the
global supply curve. Market/ economy equilibrium
means that the national product and level of prices
are shaped on the level on which buyers are willing
to buy what enterprises are ready to sell.
AGGREGATE DEMAND CURVE
The Aggregate Demand Curve shows how many
goods and services consumers can and are willing to
buy at different total price levels, other conditions
remaining the same.
It is upward sloping because an increase in the price
of cloth/price of food leads both countries to
produce more cloth and less food.
TERMS OF TRADE
TOT means the price of a country’s exports divided
by a country’s imports.
4.3 LEONTIEF PARADOX
According to the Heckscher-Ohlin theory (factor
proportions theory), a country rich in a particular
resource should be exporting products that will use
that resource and import products made from
resources that the country lacks.
with the H-O theory, suggesting Japan's position lies
between advanced economies and LDCs.
The first serious attempt to test the H-O theory was
made by Russian-born American economist Wassily
W. Leontief in 1953 when he studied the US
economy closely. The H-O theory predicts that the US
would export more capital-intensive goods and
import labor-intensive goods.
East Germany (1961):
However, Leontief was surprised to discover that the
US was actually exporting labor-intensive goods and
importing capital-intensive goods. His analysis
became known as the Leontief paradox.
Stolper and Roskamp applied Leontief's method to
the trade pattern of East Germany (EG). EG's exports
were capital-intensive. About 3/4 of EG's trade was
with the communist bloc, and EG was capital
abundant relative to its trading partners. Thus, the
EG case was consistent with the H-O theory.
Canada (1961):
The Leontief paradox showed that in the
international division of labor, the US specialized in
labor intensive rather than capital intensive goods.
Wahl studied Canada's trade pattern. Canadian
exports were capital-intensive. Most of Canadian
trade was with the US. The result was inconsistent
with H-O, and therefore, consistent with the Leontief
Paradox.
A paradox is a seemingly absurd or self-contradictory
statement or proposition that when investigated or
explained may prove to be well-founded or true.
India (1962):
Leontief paradox (para = contrary to, doxa = opinion).
Leontief took the profession by surprise and his
research stimulated an enormous amount of
empirical and theoretical research on the subject.
Boris Swerling (1953) complained that 1947 was not
a typical year: the postwar disorganization of
production overseas was not corrected by that time.
Therefore, in 1956, Leontief repeated the test for US
imports and exports which prevailed in 1951. In his
second study, Leontief aggregated industries into 192
industries. He found that US imports were still more
capital-intensive than US exports.
Japan (1959):
Tatemoto and Ichimura discovered a paradox in
Japan's trade pattern, where labor-abundant Japan
exported capital-intensive goods and imported laborintensive goods. This pattern aligns with the Leontief
Paradox, with 25% of exports going to advanced
industrial countries, which were labor-intensive, and
75% to low-income countries (LDCs), which were
capital-intensive. However, the US-Japan trade aligns
with the H-O prediction, and Japan-LDC trade aligns
Bharawaj studied India's trade pattern. India's
exports were labor-intensive, consistent with the HO theory. However, Indian trade with the US was not
in accordance with the H-O theory, but was
consistent with the Leontief Paradox. Indian exports
to the US were capital-intensive.