The "institutional factor" in the theory of international trade: new vs. old trade theories
Abstract The New Trade Theory presents novel perspectives compared to the Old Theories of international trade. Increasing returns and different institutional arrangements can explain the international specialization and trade flows even between countries which are identical in terms of factor endowments, technology and preferences for private goods. In this context the pattern of trade cannot be determined by a price/cost comparison of isolated countries. Comparative advantages can be affected by historical accidents and become a solution to a general political-economic equilibrium system. As a consequence, the institutional factor appears as a crucial element in a non purely verbal distinction between theories of interregional trade and theories of international trade. This distinction is acknowledged in the non analytical discourse of the Old Trade Theories, but it is seldom revealed in the formal models by which such theories are formulated. The New Trade Theory has the merit of dealing with this hidden factor explicitly. This paper presents 1) a reappraisal of some ideas of Smith, Ricardo and Ohlin which anticipate the role assigned to the institutional factor in the New Theory; 2) a critical assessment of how this factor is modeled in the New Trade Theory 3) an evaluation of the progress brought about by the New Trade Theory; 4) an indication of how the same factor can be treated in the light of the Old Trade Theories.
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