Why Is Global Trade?

Free trade is an important economic policy that has been brought to the forefront of debate. Arguments have varied from the potential harm it brings to specific groups of people, to the idea that free trade is extremely beneficial in the increasing of competition and improving the nationwide economy. Free trade is a policy that practices removing restrictions such as tariffs, taxes, and bans, allowing for free participation among all kinds of economies and producers. In other words, free trade is a way to “break down” economic barriers. Comparative advantage is a term often used to support the policy of free trade. The theory of comparative advantage displays that if trading partners produce where there is the lowest opportunity cost, then

Which is cost difference determines the patterns of international trade. Absolute advantage is trade benefits when each country is at least cost producer of one of the goods being traded. In the 1800s, David Ricardo developed the theory of comparative advantage to measure gains from trades. This theory is based on comparative advantage and it states each nation should specialize in production of those goods for which its relatively more efficient with a lower opportunity cost.

There were many reasons as to why the first truly global world trade came to exist, the primary reason was because of cash crops and capitalism. Cash crops are grown goods that produce a mass amount of profit by traveling to areas where the demand of the specific crop is high. Examples of some major cash crops that civilizations wanted were cotton, sugar, tobacco, and spices. The primary cash crop that Europeans wanted was mostly sugar as it could be added to almost everything. Sugar originally was only used as a medicine but, then eventually became and additive for Europeans. The only problem with sugar being the primary product people wanted, was it was extremely labour intensive. The process to grow sugar cane was back breaking as it would

International trade is based on having a comparative advantage. Countries produce products that are easier for them to produce, then

This article helps to see the theoretical development of comparative advantage through the findings of David ricardo. It states how the basis of this model can be applied to multiple goods and actually be used to benefit countries and have gains from trade.

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

The country can maximize their wealth by putting the resources in the most competitive industries. Government created comparative advantage rather than free trade because now easier moves the production processes and the machines into countries that can produce more goods (Yeager & Tuereck, 1984). However, many countries now move to new trade theory suggests the ability firms to limit the number of competitors associated with economic scale (reduction of costs with a large scale of output) (Krugman, 1992). The comparative advantage occurs when two-way trade in identical products, it will useful where economic scale is important, but it will create problem with this model. As a result, government must intervene in international trade for protection to domestic firms (Krugman, 1990)

The theory of comparative advantage explains the benefit of free trade. According to this theory by David Ricardo in the early 19th century, “Both countries will be better off if each specializes in the industry where it has a comparative advantage, and if the two trade with one another.” (Citation) International trade opens up markets to foreign supplier, and domestic companies need to improve their efficiency, boost productivity, and lower cost to increase competitiveness instead of enjoying monopolies or oligopolies that enabled them to keep prices well above marginal costs. On the other hand, international trade also offers domestic companies bigger demands and broader markets; therefore more jobs relevant to export have been created. Furthermore, jobs in the US supported by goods exports pay 13-18 percent more than the US national average (ustr.gov).

Free trade is beneficial and grows economies due to the theory of Comparative advantage. This theory states that countries should specialize and produce the goods and services in which they are most efficient. This converts a theory in which people see free trade as zero sum game into a positive sum game in which all gain. David Ricardo was the first most to come out with the theory of comparative advantage and he did so almost 200 years ago. His theory was the basis for latter theories to come and it was based on the fact that countries should specialize in goods, which they are the best in producing and his model only accounted for labor as a factor of production (Feenstra, 2011). The Ricardian models basis is that instead of factor endowments trade is affected by the growth in technology and it says a country has a comparative advantage in producing a good when the country’s opportunity cost of producing the good is lower than the opportunity cost of producing the good in another county. This pattern of trade between countries is determined by comparative advantage. This means that even countries with poor technologies can export the goods in which they have a comparative advantage (Feenstra, 2011). This is good in the sense because countries that are less developed have a chance to export products that they are good at and boost the economy and GDP. They do not have to compete and make products in which they have poor technologies; these countries can simply import those

This means it does not matter if country A can produce more overall than country B, as long as B can produce it more efficiently than country A. Country B will choose to produce that product and then trade it with country A. When a country focuses on a good that it is efficient in producing for a lower price then they increase national income and company’s increase profits. An example of comparative advantage: Country A can produce 28 bikes and 4 radios, Country B can produce 32 bikes and 12 radios. Country B has an absolute advantage in both products but it has a comparative advantage specifically in radios because it can efficiently produce 3 times more for less than Country A (Economics Online, 2017.)

RICARDO proved in 1817 that when every countries specialized in the element where they have the comparative advantage, and then trades those element, all countries are better off. This theory called the law of comparative advantage became the primary reason for international trade. Now a days MNC are the primary actors of international trade, and the bargaining model that they use with countries government can appear as a practical implementation of the law of comparative advantage. In fact Dunning, J. H. (2000) estimate that competitive advantage which is a type of comparative advantage is at the heart of company motivation and ability to operate internationally as an MNC. Besides Ramamurti, R. (2001) suggest that the traditional bargaining model is based on comparative advantage that the MNC and state have respectively. The bargaining process would then be the decision process through which each party express which comparative advantage would be traded. The MNC can for example trade its technology for the accesses to natural resource that the countries government possess. Ramamurti (2001) also emphasize the point that it became obvious that the previous process is only a part of the actual bargain and that another part of the bargain is operated at a countries level (between host and home country), this step actually allow and favors international trade between those countries, but at the hour of the liberalization the actual trade would be conducted by MNC. As an example

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.

Business internationally has thrived for an inordinate length of time due to its various assistance offered to different nations across the globe. International trade can be defined as the exchange of services, goods, and capital among different countries and regions, short of any barriers. Today it generates close to $18 trillion around the world annually.

Comparative advantage is a principle developed by David Ricardo in the early 19th century to explain the benefits of mutual trade (Carbaugh, 2008). Many underlying assumptions of comparative advantage depend on states of economic equilibrium and an absence of economy of scale. In reality, economies are dynamic and subject to innovation and interference; which has led to revised assumptions of return and competition (Krugman, 1987). These factors have created questions of free trade and governmental participation in an economy by the development of strategic trade policies. These new concepts do not replace the theory of comparative advantage; however, they further explain how trade can benefit a country's economy (Krugman, 1987).

The attainment of balance of trade is always a critical factor in the economic development of many nations. This simply means that continuous trade deficits and surpluses are undesirable. The world has become a global village in which different countries interact with themselves and get involved in business transactions and trade. This kind of trade between countries is known as international trade which involves the exchange of goods and services between nations.