Differentiate between classical and new trade theories captured on innovation
Classical trade theory and new trade theory differ in their perspectives on innovation and its impact on international trade. Here's a summary of the key differences:
Classical Trade Theory (CTT)
- Focuses on comparative advantage, which is based on the idea that countries should specialize in producing goods for which they have a relative advantage in terms of production costs.
- Assumes that technology is exogenous, meaning it is not influenced by trade.
- Does not consider innovation as a driving force behind trade.
- Predicts that trade will lead to a more efficient allocation of resources, but does not account for the potential benefits of innovation.
New Trade Theory (NTT)
- Emphasizes the role of innovation and technological progress in shaping international trade.
- Recognizes that innovation can create new opportunities for trade and specialization.
- Introduces the concept of "increasing returns to scale" (IRTS), which suggests that firms can achieve greater efficiency and productivity by expanding their production and trading with other countries.
- Predicts that trade will lead to a more rapid pace of innovation, as firms are incentivized to invest in research and development to stay competitive in global markets.
Key differences:
- Innovation: CTT does not consider innovation as a driving force behind trade, while NTT sees innovation as a key factor in shaping international trade.
- Technology: CTT assumes that technology is exogenous, while NTT recognizes that innovation can be influenced by trade and globalization.
- Specialization: CTT predicts that countries will specialize in producing goods for which they have a comparative advantage, while NTT suggests that innovation can create new opportunities for specialization and trade.
- Gains from trade: CTT predicts that trade will lead to a more efficient allocation of resources, while NTT predicts that trade will lead to a more rapid pace of innovation and economic growth.
Examples of how innovation has influenced international trade:
- Global value chains: The rise of global value chains has enabled firms to specialize in specific stages of production, leading to increased trade and innovation.
- Digital trade: The growth of digital trade has created new opportunities for innovation and trade, as firms can now easily export digital goods and services across borders.
- Biotechnology: The development of biotechnology has led to new opportunities for trade and innovation in the pharmaceutical and agricultural sectors.
In conclusion, while classical trade theory focuses on comparative advantage and assumes that technology is exogenous, new trade theory recognizes the role of innovation and technological progress in shaping international trade. The differences between these two theories have important implications for our understanding of the benefits and challenges of international trade.