DIŞ TİCARET - Deneme Sınavı - 8

Industrial revolution → Production boom → New market searches → Widespread use of liberalism in free trade or trade → Mercantilism

The idea of absolute advantage is generally attributed to Adam Smith, while “the principle of comparative advantage”, is generally attributed to David Ricardo in his 1817 “Principles of Political Economy and Taxation”.

Acquired Advantage; A country’s advantage in terms of products. The advantage gained in product technology is that a country produces unique products that can be easily distinguished from its competitors. Ex.; Danish silver-cutlery sets, Kütahya ceramics and porcelain.

Labor productivity: The quantity of a good that can be produced per unit of labor input. It is the reciprocal of the unit labour requirement.

Ricardo based his explanation of the comparative advantage law on the labour value theory, which was later rejected. In the first part of the twentieth century, Gottfried Haberler came to save Ricardo, explaining the comparative advantage law in terms of opportunity cost theory, as reflected in the possibilities of production possibilities or in the transformation curves.

Merchantalism- 1500-1600

Absolute Advantage- 1700-1800

Competitive Advantage-1800-1900

Factor Proportions Theory- 1900-2000

New Trade Theory-1900-2000

National Competitive Advantage-1900-2000 (Figure 2.5)

Production Possibility Frontier-PPF is a curve that shows the alternative combinations of the two commodities that an economy can produce by fully utilizing all of its resources.

Suppose that France has a relative abundance of capital and Bangladesh has a relative abundance of labour. Automobiles are capital-intensive to produce, while the textile is labour intensive.

The notion of reciprocal demand was presented by John Stuart Mill, but the first
complete treatment is to be found in Marshall.

INTRODUCTION

It is important to understand why trade takes place between countries. The five basic reasons why trade may take place are summarized below:

5. Existence of Government Policies: Government tax and subsidy programs alter the prices charged for goods and services. These changes can be sufficient to generate advantages in production of certain products. In these circumstances, advantageous trade may arise solely due to differences in government policies across countries.

INTRODUCTION

Countries engage in international trade because they benefit from doing so. Because it allows countries to specialize production so that resources are allocated most efficiently. Trade frees each country’s residents from having to consume goods in the same combination in which the local economy can produce them. Countries benefit from product specialization. Individuals may produce one good (e.g., bakery) and exchange that for other goods to consume (e.g., fruits).

THE RISE OF INTERNATIONAL TRADE THEORY AND MERCANTILISM

During the mercantilist period, nation states were established instead of feudalism. The official economic doctrine of the newly established nation-states was mercantilism. According to mercantilism, the main objective of foreign trade policy is to increase the gold stock (Krugman, Obstfeld, Melitz, 2017, p. 26). It was the interventionist system that focused on export in order to increase the gold and silver reserves. They gave importance to increase export, thus foreign trade surplus. On the other hand, they prohibited the import of products. Imports of raw materials were free. Traders also attached great importance to the development of the trade fleet to increase gold inflow.

According to the mercantilist doctrine, countries should export more than they import. World wealth (gold or silver stock) is constant and cannot be increased. Therefore, there is always a contradiction among  the foreign trade countries. While one side of trade is profitable, the other party suffers equally. Mercantilists assumed trade was a zero-sum game that it could not be mutually beneficial to all parties. Mercantilism is an economic theory that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is “unchangeable”.

THE RISE OF INTERNATIONAL TRADE THEORY AND MERCANTILISM

David Hume constructed what has become known as the specie-flow theory of the movement of money and goods between nations to assure equilibrium among international prices and the distribution of specie (or commodity) money among countries that are trading with each other. Hume explained that as net exports increased and more gold flowed into a country to pay for them, the prices of goods in that country would rise. Thus, an increased flow of gold into England would not necessarily increase England’s wealth substantially.

Theory of Absolute Advantage

The theory was introduced in Adam Smith’s “Wealth of Nations”, published in 1776. By assuming that each country could produce some commodities using less labour than its trading partners, he showed that all parties could benefit from international trade. Trade improved the allocation of labour, ensuring that each good would be produced in the country where the good’s production required the least labour. Result would be a larger total quantity of goods produced in the world. Trade would be a positive-sum game. A country has an absolute advantage in the production of a good relative to another country if it can produce the good at a lower cost or with a higher productivity. If the input prices are the same in both countries, the country with an absolute advantage will have lower unit production cost for that good. A country should produce and export products in which it has an absolute advantage, and a country should import products in which it has a disadvantage.

Theory of Absolute Advantage

The theory was introduced in Adam Smith’s “Wealth of Nations”, published in 1776. By assuming that each country could produce some commodities using less labour than its trading partners, he showed that all parties could benefit from international trade. Trade improved the allocation of labour, ensuring that each good would be produced in the country where the good’s production required the least labour. Result would be a larger total quantity of goods produced in the world. Trade would be a positive-sum game. A country has an absolute advantage in the production of a good relative to another country if it can produce the good at a lower cost or with a higher productivity. If the input prices are the same in both countries, the country with an absolute advantage will have lower unit production cost for that good. A country should produce and export products in which it has an absolute advantage, and a country should import products in which it has a disadvantage.

Theory of Comparative Advantage

The comparative advantage law is one of the most important laws of economy, as it is useful for individuals as well as for nations, as well as for revealing many serious fallacies. Comparative advantage is the cornerstone of international trade theory. Origins of the theory Comparative advantage was first described by Robert Torrens in 1815 in an essay on the “Corn Laws”. He concluded it was England’s advantage to trade with Poland in return for grain, even though it might be possible to produce that grain at a lower cost in England than Poland. However the term is usually attributed to David Ricardo who explained it in his 1817 book “The Principles of Taxation and Political Economy”. To be simple, assumptions will initially refer to only two countries and two commodities like in absolute advantage theory. Trade can also rely on other causes, such as large-scale production and product differentiation. The theory of comparative advantage is an economic theory about the potential gains from trade for individuals, firms, or nations that arise from differences in their factor endowments. Moreover, the comparative advantage of nations may change over time as a result of technological change.

A question may arise here. If a country has absolute advantage in all products and the other country is absolutely less productive, then wouldn’t international trade occur? According to David Ricardo, there is no need to rely international trade on absolute advantages. The key word here is comparative, meaning ‘relative’ and ‘not necessarily absolute’. They both can gain by trading with each other as long as their relative disadvantages in making different goods are different. A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country; alternatively, when the relative productivity between goods  is the highest compared with another country.

Theory of Comparative Advantage

The theory of comparative advantage is an economic theory about the potential gains from trade for individuals, firms, or nations that arise from differences in their factor endowments. Moreover, the comparative advantage of nations may change over time as a result of technological change.

A question may arise here. If a country has absolute advantage in all products and the other country is absolutely less productive, then wouldn’t international trade occur? According to David Ricardo, there is no need to rely international trade on absolute advantages. The key word here is comparative, meaning ‘relative’ and ‘not necessarily absolute’. They both can gain by trading with each other as long as their relative disadvantages in making different goods are different. A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country; alternatively, when the relative productivity between goods  is the highest compared with another country.

The Gains from Trade

The earnings from each country’s trade depends on the international price level in the ongoing international trade balance. As individuals, we benefit from receiving high prices for the products we sell and paying low prices for the products we buy. A similar principle applies to countries. A country gains more from trade if it receives a higher price for its exports compared to the price that it pays for its imports. For each country, trade gains depend on the country’s international terms of trade, which are the price the country receives from foreign buyers for its export products, relative to the price that the country pays foreign sellers for its import products (Pugel, 2015, p. 59).

Community Indifference Curves

Offer curve: An offer curve gives the nation’s offer of quantity of exports and imports. In this respect, it demonstrates the nation’s supply (exports) and demand (imports) offers.

In economic theory, zerosum game represents the situation in which one part gains in the expense of the other part.