New Trade Theory

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Definition: New Trade Theory

Full Definition of New Trade Theory

New trade theory is an economic criticism of international free trade from the standpoint of network effect and increasing returns to scale. Proponents of new trade theory have questioned the assumption whether it is effective for a country to protect nascent industrial sectors until they have developed sufficiently in order to cope internationally.

Champions of new trade theory use mathematical economics to buttress their claims. They proved quantifiable establishment of significant industries was path-dependent in such a manner that sensible tariffs and industrial planning may keep under control. A mathematical model thus developed was exceedingly technical and evoked country-wise industrial specialization. Potent examples include Swiss watches, Russian chemical industry and similar nation specializations. It should be kept in mind that monopolistic competition is an offshoot of path-dependent industrial concentrations.

New trade theorists take exception to an assumption of diminishing returns to scale. A few economists promote the opinion that protectionist steps taken by nations with the aim to construct a large industrial base allow these sectoral industries to later expand globally.

New trade theory was subjected to econometric testing and results obtained were mixed. Time-scales used and specific nature of production made it hard to produce statistical judgments. A limited set of data did not translate into a dependable authentication of hypothesis made by researchers.

New trade theory was at first propagated in the 1970s by Paul Krugman. This economic concept was given shape by MIT trained economist Victor Norman in 1976. He formulated the Helpman-Krugman theory.

Economies of scale

Gain in production efficiency as the quantity of goods produced increases. A company that accomplishes economies of scale brings down the average cost per unit through additional production as fixed costs are spread over a greater number of goods. Advantages of economies of scale include attaining companies a larger geographical reach and a bigger market.

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Definition Sources

Definitions for New Trade Theory are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 29th March, 2020 | 2 Views.