The Importance Of International Trade

1212 Words3 Pages
bulb-icon

Recommended: Importance of international trade essays

International trade is an old subject, but it continues to increase its relevance thanks to the intensification of links between countries. In fact, they are now more than ever interconnected through trade in goods and services, through cash flows and investments. These phenomena increase pervasively due to the growing trend toward globalization. Therefore, many theories, which highlight the gains from trade, were created and then developed and some of them are useful to explain the current international trade. The first developers, who laid the foundation for further and more recent theories about the importance of trade between nations, were classical economists: Adam Smith and David Ricardo. According to Salvatore (2012), Smith defined the absolute advantage theory, which states that if country A produces one commodity more efficiently than country B and the …show more content…

The difference between this model and the previous ones is that the former doesn’t assume comparative advantage as a law, but it explains this concept (Salvatore, 2010). In fact, the difference in relative commodity prices before trade between countries is caused by different relative factor abundance as well as relative factor prices, which is turned into a difference in absolute factor and commodity prices (ibid). The immediate cause of trade is, therefore, due to the fact that the absolute commodity price differs in the two nations (ibid). Secondly, the H-O model includes the factor-price equalization theorem, which assumes that “international trade will bring about equalization in the returns to homogeneous or identical factors across nations” (Salvatore, 2012, p.82). Hence, if international trade occurs, it will affect the wages and the earnings of homogeneous capital, which are led to be the same in each trading nation

Show More
Related

  • Understanding International Trade: Costs, Benefits, and Agreements

    715 Words  | 2 Pages

    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

    Read More

  • Trade: Pros And Cons Of The Expansion Of Trade

    1056 Words  | 3 Pages

    During the postclassical period, the expansion of trade had different interpretations around the world. Varying societies all reacted to trade in different ways due to how they viewed the situation. It had caused conflict in few areas around the world and also created peace as well as harm. Some communities had pros and cons to trade, like everything else. Some reasons for the positive or negative feedback on trade was due to religion, and or the philosophical system. Religion and the philosophical system was both pros or cons for trade in different civilizations. Religion helped with the spread of different ideas and religions across a mass area. Yet it had a negative input because then people fought, thinking their religion was more

    Read More

  • International Trade DBQ

    213 Words  | 1 Pages

    Trade has more similarities than differences across regions of the world for three major reasons similar good were traded, geographic location and culture/religion.

    Read More

  • International Trade Dbq

    133 Words  | 1 Pages

    Because the manors supplied their own source of materials that were needed for community the society became self sufficient. Essential needs such as food, cloth, fuel, lumber, and other goods were produced from the land or animals. Consequently the few outside purchases made were things that weren’t grown on in that region such as salt and iron. Document 3 states, “International trade was carried on only to serve the demands of the wealthy, and it was largely in the hands of aliens [different peoples]—Greeks, Jews, Moslems. Local society made almost no use of money.’’ This shows that there was little need for international trade, those of the few who participated were meeting the demands of the wealthy. Also the trade heavily relied on people

    Read More

  • The Three Empires

    952 Words  | 2 Pages

    Bentley, J., & Ziegler, H. (2008). Trade and encounters a global perspective on the past. (4th ed., Vol. 1, pp. 182-401). New York: McGraw-Hill.

    Read More

  • adam smith

    1173 Words  | 3 Pages

    Adam Smith, a Scottish philosopher is best known as the author of one of the most, well known books ever written. He is most commonly known as the “Father of Economics.” Smith contributed to the development of Modern Economics, created the invisible hand theory, which is an invisible force that is used to guide the free market and capitalist system. Ultimately, this is aided by “says that an individual's self-interest is ultimately economically beneficial to society as a whole” (ecocommerce101). Smith contributions have changed the old way of thinking that mercantilism that stated the only way to create wealth was to hoard gold and other commodities and place tariffs on other nations, in disregard for Smiths new free trade principle. Smith not only changed the way of thinking in regards to trading he helped create a world where free trade and capitalism has flourished.

    Read More

  • Hume's Theory Of Free Trade

    1064 Words  | 3 Pages

    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

    Read More

  • Krugman's Is Free Trade Passe?

    1098 Words  | 3 Pages

    Krugman defines comparative advantage as “the view that countries trade to take advantage of their differences” (1987, p. 132). Comparative advantage theories assume constant returns to scale and perfect competition. Krugman writes that trade exists when countries differ from one another in goods they have to offer, technology, or factor endowments. Although there are multiple models explaining the cause of trade, each differs as to what factors are included to explain why trade takes place. Economist Ohlin and authors Burenstam-Linder and Vernon began introducing counter-points to comparative advantage as early as the late 1950’s, saying that formal models of comparative advantage did not take into account all factors affecting international trade. International specialization and trade caused by increasing returns, as well as economies of scale and techn...

    Read More

  • Comparative Disadvantages: Hyperglobalization And Comparative Advantage

    559 Words  | 2 Pages

    The article examines some of the influential theories in the domain of international trade including hyperglobalisation and comparative advantage. The publisher was keen to demonstrate how the theories need to be embraced since hyperglobalisation promotes investments flows from partners pursuing such trading agreements. The trading partners can still reduce their operation cost such as transportation while still navigating the complexities of hyperglobalisation. The author also endeavored to demystify the terminology of comparative advantage by issuing examples and previous concerns reported on the subject. It has been hailed that the traders often traded as per their factor endowments by concentrating on spheres of their specialty. The author also hinted to the readers that the theory of comparative advantage is a major concept since it is the first theory that economics students are briefed on. Arguments in support of the theory reveals that countries that have this level of visibility stand to benefit massively once they specialize in areas of their specialty. He purp...

    Read More

  • Comparative Advantage Case Study

    1112 Words  | 3 Pages

    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

    Read More

  • Role of Governments in Trade

    1713 Words  | 4 Pages

    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...

    Read More

  • Free Trade

    1642 Words  | 4 Pages

    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.

    Read More

  • Political Arguments and Rationale Behind Trade Intervention

    1312 Words  | 3 Pages

    Firstly, what should be noted here is that international trade has been providing different benefits for firms as they may expand in different new markets and raise productivity by adopting different approaches. Given that nowadays marketplace is more dynamic and characterized by an interdependent economy, the volume of international trade has grown substantially in recent years, reducing the barriers to international trade. However, after experiencing the economic crisis that took its toll in 2008 many countries adopted a different approach in terms of trade barriers by introducing higher tariffs in order to protect domestic firms from foreign competition (Hill). Secondly, in order to better understand the implications of the political arguments for trade it is essential to highlight the main instruments of trade policy (See appendix 1).

    Read More

  • Globalization and International Commerce

    1632 Words  | 4 Pages

    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.

    Read More

  • Celtic Tiger In Ireland Analysis

    2117 Words  | 5 Pages

    During the twentieth century, the world began to develop the idea of economic trade. Beginning in the 1960’s, the four Asian Tigers, Hong Kong, Singapore, South Korea and Taiwan, demonstrated that a global economy, which was fueled by an import and export system with other countries, allowed the economy of the home country itself to flourish. Th...

    Read More

More about The Importance Of International Trade

Open Document