Thursday, December 20, 2012

CLASSICAL THOERIES OF TRADE



Classical theories of trade
Over the period, the global regime has witnessed emergence of significant development in the performance of the economy and in the establishment of the factors of production. Analysis of the global economies has reveled the development received in the national economies has taken considerable steps that entails the adoption of significant economic policies. The economic growth of the nations is extremely vital for the development of the global economies and the aspects of the classical economists have significantly enhanced the development experienced in the modern economies. The contribution of the classical economist has significantly assisted the establishment of trade in the modern economies because the aspects of trade adopted in the modern economies were formulated by the classical economists in the past era of the 17th century (Salvatore, 2012). Classical economics refers to the economic works done by the groups of economists in the eighteenth and nineteenth centauries. These groups of economists in the classical developed significant theirs regarding the operations of the market and observation of trade. Therefore, the theories highlights how the markets work and further states how the market performance enhances economic growth. Some of the renowned classical economists include Adam Smith, David Ricardo, John Stuart Mill and Thomas Malthus amongst others (Carbaugh, 2010). Over the period, analysis of the performance of the economies has revealed that the theories of trade formulated by the classical economists have significant influence the establishment of modern trade. In this regard, it is evident that the establishment of the classical theories of trade was extremely critical in observing the changes and movement in the market because their consideration provided ideal understanding of the complexities in the market (Husted & Melvin, 2007). The establishment of classical theory of trade considers the aspects of mercantilism, absolute advantage and comparative advantage. The consideration of modern day trade theories considers the effects of international trade that considers the aspects of imports and exports.

Classical theories of trade
Mercantilism
Te development of the mercantilism system of the economy advocated for the establishment of commercial revolution and this system was established with the aim of transforming the aspect of trade in the economy from regional to the national level. The attributes of the classical economies has revealed that mercantilism is a philosophy that has been inexistence for more than 300 years and it has continued to impact on the performance of the economy (Pugel, 2012). The development of this trade theory was based on the idea that national wealth is more vital than regional wealth. Therefore, the provisions of this theory highlighted the need for the countries to increase their participation in international trade through the consideration of increasing the aspect of imports and exports. The depiction of increasing national power and wealth resulted in the consideration of increasing exports in exchange for precious metals that were beneficial for the purpose of increasing trade within the nation. This theory emphasized on the established of a positive balance of payment because it was characterized by more exports and less imports. However, mercantilism declined because it reduced the standards of living and much of the economies wealth was held by the monarchs in the form of gold bullion.

Absolute advantage theory
The failures of the mercantilism theory resulted in the establishment of the theory of absolute advantage. The prospect so mercantilism was criticized because it favored the operations of the producers more than those of the consumers. In this regard, there was need to establish a reliable market system that considered the disparities and complexities of the consumers and the absolute advantage theory was established. The theory of absolute advantage is critical because it enhances the aspects of international trade but also considers the contributions of the internal market (Appleyard, Field & Cobb, 2010). The development of this trade theory is aimed at enhancing the satisfaction of the consumers therefore; the theory considered the use f the most efficient method of enhancing satisfaction of the market (Salvatore, 2012). With regard to this, the theory considers the aspect of internal production of goods and services and illustrates the aspect of comparing factors of production used in satisfying the wants. The comparison of the external factors from the international market with the internal factors from the internal market leads to the establishment of absolute advantage and the economists in the economy can choose the market with absolute advantage. In this regard, the theory states that sometimes the external market is more expensive and leads to the reduction of the consumer’s satisfaction.  This theory considers the aspect of production possibility frontier that highlights the best production combinations of the market. From the figures below, it is evident that the establishment of the highest combination will be considered by the economy for the purpose of engaging in trade.
Source (Carr, 1997).
Furthermore, the attributes of production possibility frontier analyses the possibility of the economy in terms of the necessity to produce a commodity locally or the benefits of importing the same commodity from the external market. In this category, efficiency of production and the availability of the factors of production are the critical attributes that influences the theory of trade (Chacholiades, 2006). This trade theory introduced by Adam Smith has proven to be extremely critical in ascertaining the conduction of trade in economy with regards to local trade and international trade because it helps the economists in making trading decisions.

The theory of comparative advantage
In illustration of the theory o comparative advantage, David Ricardo noted that countries can gain from the consideration of engaging in trade even if one of the countries is less productive than the other in the production of all commodities. The provision of comparative advantage is based on the consideration that different factors of production in different countries enhance the production of different commodities (Feenstra & Taylor, 2011). In this regard, the countries should consider the aspect to self reliance. In stead, the economies should engage in the aspect of exchange of commodities through the aspect of trade. In this regard, the theory of comparative advantage enhances the conduction of international trade and further capacitates on the attribute of efficient usage of factors of production and satisfaction of the consumers. The depiction of comparative advantage is better illustrated through the use of the figure below.
From the figure above, the following facts are evident
  1. Country A is best suited for the production of commodity X
  2. Country B is best suited for the production of commodity Y
The analysis of the above provision presents ideal chance for the conduction of trade because both countries are best suited in the production of specific commodities. Therefore, country A can major in the production of commodity X while country B can employ the usage of all the resources to produce commodity Y. finally, these tow countries can engage in the aspect of international trade where they will exchange different commodities.  In reality, this is ideal and it has been adopted in the modern aspects of trade where countries have noted the benefits of specialization rather than engaging in self sufficiency where all the economic factors and sectors are inefficient.

Development of modern world trade pattern
Over the period, the global regime has experienced development resulting in the establishment of globalization. The consideration of globalization is denoted as the aspect of enhancing trade between the nations because the consideration of globalization is based on the consideration of regional integration.  Regional integration is an aspect that has resulted in the development of international trade and is this regard, borrowed significantly for the derivatives of classical theories of trade. The establishment to regional integrations based on the considerations of classical theories of trade that was developed by the classical economists (Krugman &Obstfeld, 2012, Chipman, 2008). The consideration of adopting regional integration and globalization are beneficial aspects that encourage trade prospects between different countries because the provision of country commodities differs from those of the other country. The depiction of this attributes of regional integration has been ascertained to have origin the specification of the classical theories because they emphasized on the aspect of exchange of resources between two or more nations.

The development of the modern trade is based on the movement of goods between tow or more countries and this incentive forms and integral aspect of the modern world trade. In reality, the aspect of trade involves the exchange of commodities including money and this provides ideal relationship with the mercantile system of trade that was based on the consideration of exports in exchange for gold and other precious metals (Dimand, 2004,  Whittaker, 2000). The consideration of engaging in the modern world trade is based on the consideration of mercantile theory because this theory identified the need to engage in trade with international communities. The similarities in the depiction of international trade are similar between the tow attributes. However, the consideration of the classical necessitated the establishment of international trade based on the old terms of labor and the theories of value while the development of the modern day world international trade is based on the general equilibrium of the theory of value. In this regard, it is clearly illustrated the formulation of the modern world international trade has the pacification of the classical theories s but the significant differences is denoted as the contributions of the necessitation factors where value is considered as the driving factor for modern world trade as opposed to theories of labor.

The development of modern world trade is based on the consideration of the differences in the prices and values of commodities (King, 2000). This sentiment is based on the consideration of the classical theories that based their aspect of international trade on the provisions of factor price differences. Factor price differences were established by the classical economists because they aspired to initiate the creation of values through the usage of factors of production. On the other hand, the establishment of modern attributes of international trade is based on the consideration of the differences in commodity prices, the pricing of the commodities and pricing of factor pricing are based on one ideology. The analysis of the strategies for the conduction of international trade are ideal and similar with regard to the classical period and modern world trade and this significantly confirms that the modern world trade is based on the classical theories.

Another significant attribute that highlight the similarity in the classical international trade and modern world trade is the consideration of the basis of the engagement in international trade. Over the period, analysis conducted on the aspect of international trade has revealed that the establishment of classical international trade and modern world trade has significant relations and patterns of condition because they both involve the participation of tow or many countries (Feenstra, 2004). However, the analysis has further reveled that the consideration of classical international trade is a normative and welfare oriented while the establishment of modern world trade is based on the consideration of the gains. Therefore, a gain from the international trade is the driving factor that drives the conduction of modern world.  The aspect modern world trade is based on the realization of the benefits that various countries will gain form engaging in the aspect do trade. An example depicting nth establishment of modern trade is the case of two countries like Iran and Kenya. Over the period, Iran has been known for the production of oil while Kenya is known for the production of Tea. Therefore, the aspects of modern trade calls for the aspect of the two countries engaging in the international trade where they will exchange the goods they produce (Hudson, 1999, Mukherjee, 2007). In this regard, Iran will sell oil to Kenya while Kenya will sell her tea to Iran. This establishment of trade highlights the attributes of trade based on value of the commodities exchanged by the countries. Of importance is the consideration of comparative advantage and specialization. Comparative advantage is an important aspect that leads to the development of specialization. Specialization is critical for the establishment of international trade because it results in the consideration national and economic development. The classical economic theory illustrated by David Ricardo highlights the benefits of attaining comparative advantage because it enables the nations to realize what the economy is best suited to produce and this leads to the establishment of modern world trade.

Conclusion
The development of international trade has taken significant aspect of transformations form the attributes of classical theories. Analysis has proven that the development of modern world trade significantly depends on the establishment of classical theories. The aspect of international trade has significantly contributed to the establishment of regional integration and this has continued to be beneficial because the nations can have access to the goods and other commodities not produced in the local market. The aspects and provisions of classical theories has significantly influenced the consideration of modern world trade because the current activities conducted in the global market are based on the policies f the classical theories. The development of modern world trade is based on the consideration of the differences in the prices and values of commodities. This sentiment is based on the consideration of the classical theories that based their aspect of international trade on the provisions of factor price differences. Factor price differences were established by the classical economists because they aspired to initiate the creation of values through the usage of factors of production. On the other hand, the establishment of modern attributes of international trade is based on the consideration of the differences in commodity prices, the pricing of the commodities and pricing of factor pricing are based on one ideology. In conclusion, the classical theories have significantly influenced the establishment of modern world trade and the operations of the world trade are based on the specifications of the theories.


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