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Economics 244 International trade
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International trade covered in economics 244 neatly and well summarised
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PART 1Why does International Trade matter?
Theory of International trade timeline
Definition:
- International Trade: is the exchnage of capital, goods and service across
international borders or territories. It has also led to significant economic prosperity,
although unevenly spread across the globe.
Economic prosperity through trade arises from:
1. Exploitation of comparitive advantage – trading partners reap mutual gains when
each nation specialises in goods for which it holds comparitive advantage and then
engages in trade for other products.
2. Gains from specialisation – higher production volumes provide further cost enefits ito.
Economies of scale
3. In increased competition which lowers world prices and promoted efficiency
4. The breakdown of domestic monopolies
5. The ptential increase in the variety and quality of goods and services
6. Employment, given that employment is closely related to production
ADAM SMITH:
The father of economics
Spent much of the wealth of Nations slaying the “Mercantilist dragon.’ Who then,
were the Mecantilist, and why did their thouhts and practices lead him to draw his
literary sword
1500-1700:
Mercantilist
The first theory of international trade, underlines the desire to build a prosperous and
powerful state
Believed that the wealth of a nation is measured by how much gold and silver (the
currency at then time) they had in the national treasury
From their perspective; exports were good, because foreign nations would pay for it,
bringing a inflow of gold and silver
Imports meant gold and silver leaving the country to pay and therefore should be
limited
Very powerful class and able to influence governent policies
Achieving their goals was accomplished by imposing strict government control and
regulations on trade, commerce and economic activities
The restrictive economic policies imposed included high tarrifs, especially on
manufactured goods, export subsidies, limiting wages, exclusive trade with colonies,
maximising the use of domestic resources, government support of new industries
throug the provision of capital and tax benefits, and the establishment of monopolies
over the local and colonial market
The government would also provide grant titles and pensions to successfull poducers
, Thomas Mun – (1664) “ the ordinary mean therefore to increase our wealth and
treasure in by foreign trade, wherein we must ever observe this rule; to sell more to
strangers yearly than we consume of theirs in value.”
FEATURES OF A MERCANTILIST ECONOMY:
1. Import of certain goods were prohibited throug the imposition of tariffs and other
restrictions by the government
2. The government prioritised export indstries through the provision of subsidies
3. Policies of nationalism were imposed
4. Wealth was measured in gold and silver in the national treasury and private
accumulation, use or export of precious metals was prohibited
5. Promotion of one-way trade with colonies and importation of precious metals from a
trading partner
THREE ASSUMPTIONS OF MERCANTILISM:
1. There is a finite amount of wealth in the world
2. A nation should have a positive Balance of Trade by exporting more than it imports
3. A nation can only grow rich at the expense of other nations; therefore trade is a zero-
sum game
The view of trade as a zero-sum game not only encouraged the adoption of complex
government trade restrictions, which raised prices and stunted the growth of freedom of
businesses, but it also ignited the conflict between trading parties and colonies in some
instaces.
Whilst the decline of mercantilism can be linked to the rise of the laissez-faire docrine of
free-market economics, it is the publication of Adam Smith’s “The Wealth of Nations” that
was generally thought to mark the end of the Mercantilist era. Adam Smith coined the term
“mercantile system” to describe the system of political economy that sought to enrich the
country by straining imports and encouraging exports.
1776
ADAM SMITH’S ABSOLUTE ADVANTAGE
Challenged the mecantilist idea that national wealth was reflected in a country’s
holdings of precious metals
by convincingly arguing that national wealth was reflected in a nations’s productive
capacity rather than the stock of gold and silver (money).
More growth in productive capacity was fostered best in an environment where
individuals are free to persue their self-interest
Self-interest, in-turn, would lead individuals to specialise in and exchange goods and
services based on their special abilities
Thus gains are required through division and specialisation of labour
- ADAM SMITH AND THE DIVISION OF LABOUR
Breaking a process up into smaller steps and learning to execute those steps very
well through learning, practice and specialisation boosts producivity
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