Trade Pattern Theories

There are two main factors that determine a country’s tendency to trade internationally. The first is the proportion of its production that is comprised of nontradeable goods, or products and services that aren’t practical to export. The other factor is the country size, which can mean land area or the size of the economy. A country with a larger land area has a tendency to trade a lower proportion of its production because it will have a larger variety of natural resources. Countries with large economies trade more because they have greater production and higher incomes.

The factor-proportions theory explains what types of products a country has a tendency to trade. This theory looks at the basic factors of production of labor, land, and capital. If a country has a high endowment of a particular factor, then this factor will tend to be cheaper than the other factors. This helps to determine what types of products are produced, and thus traded.

Written by Carl Phelps, Research Associate for GLOBAL ID, LLC.