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Two advantages of free trade essay
Why is free trade good for the economy
Advantages of Free Trade in the International Political Economy
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Free Trade
International trade links countries to the global economy (Vollrath, 1991).
The global economy needs free trade. Countries need free trade. Trade with other countries occurs at some level in every country globally. There may be some indigenous tribes within some countries that can lay the claim that they are self-sufficient, however, there is not a single country that can say the same. Proponents of an open trading system contend that international trade results in higher levels of consumption and investment, lower prices of commodities, and a wider range of product choices for consumers (Carbaugh, 2009, p26). Free trade is necessary. How do countries decide what to import and what to export?
Comparative Advantage
Ricardo's Theory
David Ricardo was a leading economist in the 1800s. Ricardo was a leading advocate of free trade. Adam Smith was also an advocate of free trade. Smith was more confident than Ricardo that the ability of a market economy's potential could benefit society. (Carbaugh, 2009). Ricardo felt that a countries government should not meddle in free trade and could hinder free trade instead of help it. Ricardo's theory of comparative advantage has been used by economists for years. The law of comparative advantage states that the citizens of each nation can gain by spending more of their time and resources doing those things in which they have a relative advantage (Carbaugh, 2009, p12). What this means is that one needs to determine whether the production of a goods or service is done more economically either domestically or abroad. Even if one country has the advantage in all situations, both countries can still benefit. The theory states that the less efficient nation should specialize in and e...
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... most likely will not change much because countries are content with the way the current trade policies work and with the current global economy in question, many countries will be afraid to try to make a change. Perhaps, when the global economy is more stable, some countries may be brave enough to go against the status quo and try to change how they do business.
Works Cited
Carbaugh, Robert (2009). International economics, (13th ed.). South-Western, Cengage Learning. ISBN 13: 9780324581485
Krugman, P.R. (1987) Is free trade passé? The Journal of Economic Perspectives, 1(2), 131-144. Retrieved from http://dipeco.economia.unimib.it/Persone/Gilli/food%20for%20thinking/simple%20general%20readings%20on%20economics/Is%20Free%20Trade%20Passe.pdf
Vollrath, T. L. (1991). U.S. trade in competitive world markets. FoodReview, 14(1), 26. Retrieved from EBSCOhost.
Trade is the most common form of transferring ownership of a product. The concepts are very simple, I give you something (a good or service) and you give me something (a good or service) in return, everyone is happy. However, trade is not limited to two individuals. There are trades that happen outside national borders and we refer to that as international trading. Before a country does international trading, they do research to understand the opportunity costs and marginal costs of their production versus another countries production. Doing this we can increase profit, decrease costs and improve overall trade efficiency. Currently, there are negotiations going on between 11 countries about making a trade agreement called the Trans-Pacific
Trade is essential to overcome the dollar gap that prevented foreign marketing of United States goods (Melanson and Mayers, 159). There are many economic issues which face the nation at this time. A recovery from World War II and the Korean War, a recession, a change in the political party of the president, and several other issues. Thus, this must be a time of strong economic leadership. The policies made and legislature passed must steer the United States through this apparent storm and give the nation a chance to rest from the hecticness of the first half of the century.
As Ian Fletcher pointed out in Free Trade Doesn’t Work: What Should Replace it And Why, nations need a well-chosen balance between openness and closure toward the larger world economy (Fletc...
Free trade for Ricardo is more based off of labor then pricing as it is with Smith and Hume. He talks on how the amount of labor per unit produced is the most important factor for finding comparative advantages. “Through a mathematical approach, Ricardo furthers the analysis of Smith’s absolute advantage and better demonstrates the trade gains. In addition, while developing his approach Ricardo only used one factor of production, which is labor.”(Emilienne Kamandinako)This comparative advantage is in a country that possibly has no absolute advantage in any sector of their market. They have, though, a sector where they can create a product with less labor then another country. Since they can do this, the country stops putting labor toward that area and lets the country with the comparative advantage take over and then make a trade. Comparative advantage is, for Ricardo, a fuel for economic growth since there will be more products supplied to the consumers in any market. This economic growth comes from comparative advantage in free trade and commerce, which Ricardo explains more by
Roberts, Russell. (2006). The Choice: A Fable of Free Trade and Protectionism. New Jersey: Prentice Hall.
After the release in 1776 of Adam Smith's " Wealth of Nations " theory of free trade in a matter of decades unequivocally won the " battle of ideas " Smith showed that free trade and the international division of labor which it generates benefits all participants in this process. Thus, for the approval of free trade was necessary to win many more fierce battles.
Josling, Tim. “Key Issues in the World Trade Organization Negotiations on Agriculture.” American Journal of Agricultural Economics v.85, n3 (August 2003): 663-667
According to international trade theory of David Ricardo, every country should specialize on manufacturing goods that it has comparative advantage in: lower costs on labour and raw materials. Ricardo states that in this case, every country will benefit. This makes world trade necessary for all countries.
All nations can get the benefits of free trade by being specialized in producing goods they have a comparative advantage and then trade them with goods produced by other nations in the world. This is evidenced by comparative advantage theory. Trade depends on many factors, country's history, institution, size and. geographical position and many more. Also, the countries put trade barriers for the exchange of their goods and services with other nations in order to protect their own company from foreign competition, or to protect consumers from undesirable products, or sometimes it may be inadvertent.
The Law of Comparative Advantage was introduced by David Ricardo in 1817 in his book ‘Principles of Political Economy and Taxation’. According to this classical theory, a comparative advantage exists for a country when it has a margin of superiority in the production of a certain commodity over others. Comparative advantage results from differing endowments in the factors of production like technology, natural endowments, climate, etc. among different countries. Therefore, each country exports the commodities which it can produce at a lower opportunity cost or, in other words, lower marginal cost of production and imports the rest. This would ultimately be beneficial for all countries engaging in free trade as each would gain through its specialization
In order for international trade to work well, governments must allow the world market to determine how goods are sold, manufactured and traded for all to economically prosper. While all nations may have the capability to produce any goods or services needed by their population, it is not possible for all nations to have a comparative advantage for producing a good due to natural resources of the country or other available resources needed to produce a good or service. The example of trading among states comprising the United States is an example of how free trade works best without the interve...
Free trade was first observed by Adam smith in 1776. “These artificial constraints to free trade are detrimental to a society” (Adam Smith). Until his book was published so many people had different skeptic about free trade. As a result of Adam Smith's book titled Wealth of Nations, free trade achieved an intellectual and rational status supreme to any other principle in the field of economics.
In analyzing free trade versus other systems that promote trade in dissimilar ways, one must take into account a 360 degree view of all supporting and derogatory factors of each style. There is no such thing as perfect competition or constant returns; these are both factors that can never truly be in place because of the nature of an economy. The fact is that “economists do not have reliable models” (Krugman, 1987, p139) to truly reflect economic behavior. But for the sake of building theory, assumptions like these must be made to prove points and provide new ideas on age old questions. For this analysis we will be comparing free trade against strategic trade policy and a system of external economics. All three have there place, depending on how one would like to shape an economy and what compliments an economy in the most proficient way.
Globalisation has been one of the most significant developments of the last half century, and issues such as trade and international commerce have become increasingly important. In consequence, problems such as poverty, unfair wages and poor working conditions in third world countries have been drawn to the attention of consumers (Hayes and Moore, 2007). This is a growing global issue which cannot be ignored by anyone concerned about the problems in developing countries. Free trade and Fair Trade have both been offered as solutions to these issues.
Bagwell, Kyle & Staiger, Robert W. "A Theory of Managed Trade," American Economic Review. 1990. American Economic Association, vol. 80(4), pages 779-95.