Assignment Essay Example | Topics and Well Written Essays - 2000 words - 10

Assignment - Essay Example These barriers have overtime been significantly eliminated through bilateral and multilateral trade agreements. Classical trade theory, however, predicts that countries specialize in production of commodities which best suits their relative factor endowment. This kind of specialization gives rise to advantage in international trade in merchandise. According to classical trade theory, differences in relative factor endowments cause factors of production specialization causing trade in international markets. Trade theory further expounds that, trade in commodities with varying factor intensities may eliminate local diminishing returns to factors of production and thus the need for capital to flow across the boundaries (Lerner 1952). From another standpoint, Leontief (1954) viewed international commodity trade from the perspective of differences in regional factor proportions such as source of comparative advantage. He argues that different parts of the world have differing intensive intermediate goods and every region specialize in particular type of commodity, which uses their abundant factor intensity Reduction in cost of trade includes transportation, currency exchange and communication also contributed to rise in global commodity trade. Increase in income per head is also another factor that increases cross- border trade. As income per head increases, consumers tend to switch their spending habits away from basic to manufactured commodities, which on the other hand offer more scope for product diversification, differentiation and international trade. The classical trade model stipulates that countries would prefer to produce commodities that are relatively cheaper for them to produce. The weak economic growth mostly amongst the developed economies is one of the major factors that contributed to the sharp decline of the world merchandise trade within this duration. Trade