Neoclassical Trade Theory

Nations trade with one another because it is mutually advantageous for both parties when one is more efficient at producing a certain good and at a lower cost, and the other is proficient at producing a different good or service more efficiently. This is based on Ricaro’s theory of comparative advantage.

We all know the universal knowledge that one cannot receive anything without giving something in return. We, being normal everyday American citizens, trade in various ways in our constant, normal lives. To trade, in the simplest of terms, is the buying or selling of goods/services. Trading money for food, or our time for money is just common way that we trade in our normal lives. Now, take the small scale of trading that we all know, and enlarge it to the trade with other countries. The United States trades frequently with other countries in order to keep our economy running. Seeing as a lot of the resources we depend on today can be found cheaper and are easier to obtain in other countries, its only natural that both small and large

However, it was apparent to economists that nations with similar resource endowments exchanged similar products with each other. Economists felt that trade explained solely by comparative advantage was an incomplete analysis of international trade. Furthermore, since the classical trade theory was unable to explain intraindustry trade, economists decided to expand on the classical trade theory by creating a new theory of trade (Carbaugh, 2011). The new theory states that economies of scale provide incentive for a country to specialize in a particular product (Carbaugh, 2011). Furthermore, based on economies of scale, nations with similar factor endowments will trade with each other as sometimes it is beneficial (Carbaugh, 2011). Arguments stemming from this new trade theory puts the economic case for free trade in doubt.

International trade theory provides explanations for the pattern of international trade and the distribution of the gains from trade. The study of trade emerged in the era of mercantilism (approximately in 16th century) as a crude set of arguments about how a nation should trade. The theory of International Trade examines the reasons why different countries exchange their products, but in addition the aftermath that this process has, in the internal economy of a country involved in international trade. Adam Smith, in The Wealth of Nations in 1776, postulated that under free trade, each nation should specialize in producing those goods that it could produce most efficiently. Some of these would be exported to pay for the imports of goods that could be produced more efficiently elsewhere. Smith ridiculed the fear of trade by comparing nations to households. Since every household finds it worthwhile to produce only some of its needs and to buy others with products it can sell, the same should apply to nations. The theory of absolute advantage is based on the assumption that the nation is absolutely better (i.e., more efficient) at production of

Trade is an engine of growth; it has many effects and benefits that can help to grow the economy on a global scale. The benefits of trade can be viewed in different perspectives depending on the view that is taken the benefits and the receivers change. Trade can be viewed from the perspective of the economic nationalist, which argues that protectionism is a need to help grow the states economy and power. While in another approach trade can be seen as positive sum game by the means of comparative advantage through the lens of liberalism. Lastly there are some that argue that specialization of goods is a way to increase productivity and economic growth. The focus of my paper will be to present these perspectives on and suggest

Since the early 1930s, tariff reduction has been the prevalent theme of United States trade policy. In the future, economic historians will put an emphasis on the way the liberalization of trade over the past forty to sixty years has molded this particular trade policy. Since 1930, tariffs have been gradually reduced to roughly twenty percent of the regular level they were back then. This is a direct result of a sequence of eight multilateral negotiations and around thirty bilateral agreements. However, in order to completely understand why tariff reduction has been a prevalent theme since the 1930s, one must consider the changes that have directly affected the Unites States’ backing of trade liberalization. There are many things that have

Trade rumors are getting wild as the February trade deadline is only two months from now. One new rumored deal between three teams is being the hot topic of the news today. It involves the Los Angeles Lakers, Minnesota Timberwolves and New York Knicks with Carmelo Anthony and Kristaps Porzingis as centerpieces of this supposed deal.

The Ricardian trade model is a simple yet powerful theory that refutes common fallacies about the causations of trade flows. It illustrates that, instead of absolute advantage, it is comparative advantage that brings forth the gains from trade. Comparative advantage refers to the ability to produce a product at a lower opportunity cost than another. This ability is the result of

Economic analysts say trading among other countries with no stipulations improve global efficiency in resource allocation (Tupy, 2005). Free Trade delivers goods and services to those who value them most and allows partners to gain from specializing in the producing those goods and services they do best; according to Tupy’s findings, Economists call that the law of comparative advantage. Tupy also states when producers create goods they are comparatively skilled at i.e. Germans producing beer and the French producing wine, those goods increase in abundance and quality. Trade allows consumers to benefit from more efficient production methods, for example, without large markets for goods and services, large production runs would not be economical. Large production runs, in turn, are instrumental to reducing product costs while lower production

(Krugman 1987,131) Free trade supporters make a point that if we don’t move toward liberalization, the gravity of protectionism and political interests will pull us back-“bicycle theory”. (Bergsten 1996, 109). The successful example of bicycle moving forward is the Uruguay Round conclusion. (Bergsten 1996, 109). Following that NAFTA and such, have made a significant progress in resolving debate in the international trade arena. Liberalist economists insist that with openness toward international trade, countries benefit in multiple segments and knowledge is one of the major exchanges which are crucial for improvement. ( O’Brien & Williams 2013,112) Therefore, it is important to understand liberalist perspective at first. Economic liberalist view human nature acting rational in order to maximize their self-interest. This theory strongly support the thought where individuals when acting rationally create markets which produce, distribute and consume goods function best free. This way international wealth is maximized with exchange of goods and services which is also a comparative advantage based theoretical aspect. (Mingst &Toft, 2104, 310) With Ricardo’s comparative advantage, it’s important to mention specialization of a commodity that a specific country can produce more efficiently in exchange for another commodity.

In addition, environmentalists worry that the industry is now following proprer safetyt precautions with the chemicals it uses.

It is important to state that Heckscher-Ohlin theory does not contradict the Ricardian one which is based on the assumption that international trade is based on differences in comparative costs. Actually Heckscher-Ohlin theory tries

The international trade of goods across the world accounts for approximately 60% of the world Gross Domestic Product (The World Bank, 2014). A great proportion of goods transactions occur every second. The primary question is whether international trade benefits a country as an entirety, and, if so, why would a country implement protective trade policies to restrict particular exports? To address this question, this essay aims to explore the impact of trade on various economic stakeholders, including consumers, producers, labour and government and, furthermore, will compare models and theories with reality to ascertain the true winner/ loser in the international trade market.

Adam Smith outlined that the price mechanism in international trade is like an ‘invisible hand’ that coordinates the consumption and production decisions in a well-functioning market economy (Kerr and Gaisford 2007). However, there is need for the government to intervene in free market economies in order to implement trade regulations and avoid market failure that is associated with negative externalities. International trade is affected by government’s interventions that include direct participation in supply and purchase of essential goods and services, through regulation, taxation and other indirect participation influences. The free markets enhance market efficiency through ensuring that prices are determined by the

In the capitalised world, the participants are likely to open their markets in order to potentially promotes consumption efficiency as well as productivity; particularly, under perfect competition, trade liberalisation may enable economic welfare to maximise (Balassa, 1962: 59). Due to open markets, reallocation may contribute to allow more people to access sufficient sources to live. Indeed, it is speculated that once poor countries assimilate trade liberalisation in appropriate conditions, they can enhance economic and social performances (Singh, 2013). Thus, trade liberalisation can contribute to comparative advantage and national industries tend to be specialised. This leads to a rise in average productivity through the reallocation of productive resources from less to more efficient firms; consequently, economic welfare can be increased through specialisation (Apolte and Möller, 2010: 2; Vancauteren and de Frahan, 2011: 484). In the long run, trade liberalisation can prosper national economy.