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International Trade Theories Essay

1322 words - 6 pages

International Trade Theories
For starters, international trade theories are theories that explain international trade. Since trade is basically the exchanging of goods and/or services between entities or people, then international trade would be the exchanging of goods or services between countries. International trade happens in an effort to benefit the countries involved, in some way. According to the U.S. Chamber of Commerce, “America cannot have a growing economy or life wages and incomes of our citizens unless we continue to reach beyond our borders and sell products, produce, and services to the 95% of the world’s population that lives outside the United States. More than 38 million ...view middle of the document...

Mercantilism flourished in 1500 to 1800 due to the emergence of new nation-states and armies were being raised as well as national institutions were being invested in by governments that were empowered by gold. This was all to keep the allegiance of people solidified to the new nations. In this, the government place restrictions on imports and subsidized production that served as no competition in domestic markets, a strategy known as protectionism. Some countries had an additional way of obtaining gold, which was by using their colonies to support this form of trade and having their colonies to supply commodities, which would have otherwise been purchased from a county with no association to them, to run trade surpluses. The government not only did this by controlling trade of the colonies, but also by forcing the colonies to export less valuable goods to them and importing more valuable goods to them (Daniels, Radebaugh & Sullivan, 2011).
The theory of absolute advantage, came into play in 1776 with philosopher Adam Smith. Smith said goods and services available to the citizens of a country are what make up that country’s wealth, rather than that country’s holding of gold. The theory of absolute advantage, according to smith, “holds that different countries produce some goods more efficiently than others and questions why the citizens of any country should have to buy domestically produced goods when they can buy them more cheaply from abroad” (Daniels, Radebaugh & Sullivan, 2011 pg. 220). Smith reasoned that intervention from the government nor government policy should regulate or restrict trading internationally. Smith believed that if trade had no restrictions, countries could produce products in which that country specialized in, creating a competitive advantage. This would then enable the country to compete in efficient industries and in turn create more skilled labor, reduce the time of switching between the productions of products and provide incentives for more efficient working methods. This method could produce more imports than produced due to the excess specialized production. Smith believed that the marketplace would determine what products a country would specialize in, as he thought a country’s advantage would be either natural or acquired (Daniels, Radebaugh & Sullivan, 2011).
Years later, in 1817, the question “what happens when one country can produce all products at an absolute advantage?” came to light by economist David Ricardo, thus developing the theory of comparative advantage. This theory states that “global efficiency gains may still result from trade if a country specializes in those products it can produce more efficiently than other products – regardless of whether other countries can produce those same products more efficiently or not” (Daniels, Radebaugh & Sullivan, 2011 pg. 223). In other words, country A cannot produce product C that better that Country B, but Country A can produce product C...

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