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
- Country A is best suited for the production of commodity X
- 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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