The Economic Basis for Trade

7 Key excerpts on "The Economic Basis for Trade"

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  eBook - PDF

  Introduction to International Economics

  • Dominick Salvatore(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  32 Part One International Trade Theory 2.10 Basis for and Gains from Trade Under Constant Costs Summary Review Questions and Problems Appendix: Comparative Advantage with More than Two Commodities and Nations A2.1 Comparative Advantage with More Than Two Commodities A2.2 Comparative Advantage with More Than Two Nations Selected Bibliography INTERNet KEY TERMS Basis for trade Gains from trade Pattern of trade Mercantilism Absolute advantage Laissez-faire Law of comparative advantage Labor theory of value Opportunity cost theory Production possibility frontier Constant opportunity costs Relative commodity prices Complete specialization Small-country case 2.1 INTRODUCTION In this chapter, we examine the development of trade theory from the seventeenth century through the first part of the twentieth century. This historical approach is useful not because we are interested in the history of economic thought, as such, but because it is a convenient way of introducing the concepts and theories of international trade from the simple to the more complex and realistic. The basic questions that we seek to answer in this chapter are: 1. What is the basis for trade and what are the gains from trade? Presumably (and as in the case of an individual), a nation will voluntarily engage in trade only if it benefits from trade. But how are gains from trade generated? How large are the gains and how are they divided among the Basis for trade The forces that give rise to trade between two nations. This was absolute advantage according to Adam Smith and com- parative advantage according to David Ricardo. Gains from trade The increase in consumption in each nation resulting from specialization in production and trading. trading nations? 2. What is the pattern of trade? That is, what commodities are traded and Pattern of trade The commodities exported and imported by each nation.

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  Economic Analysis and Law

  The Economics of the Courtroom

  • Christopher E.S. Warburton(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  As far as the trade rules are concerned, the GATT/WTO has made a valuable contribution over the years to greater stability, certainty and fairness in trade. But the rules are not perfect and there is always room for improvement. This is one reason why governments continue to negotiate and to seek out further mutually advantageous accommodation. Like trade liberalization, crafting better rules remains a work in progress.

  (WTR, 2007, p. iv)

  8.2 Trade theories as foundations of international trade law

  International economic laws are intricately related to the liberal exchange of goods and assets across international boundaries. That is, goods and financial assets are expected to be exchanged across international boundaries without undue or unfair restrictions that will imperil the welfare of business and consumers. Consequently, international economic laws must be evaluated against welfare effects and economic theories that articulate collective improvements on the welfare of nations. The bases and effects of international trade are probably the most important foundational concepts to understand the spirit and intent of international economic laws.

  The initial impulses suggested that international trade must be done to the peril of other nations. Essentially, the early proponents of international exchange believed that trade was a zero-sum game. Pointedly, nations can only gain at the expense of others, meaning that nations must impose restrictions on international exchange that will only be beneficial to their self-interests. The problem is that no nation will benefit if each and every nation behaves as such.

  The mercantilists were the first to experiment with the idea of restrictive exchange in order to amass national wealth for proprietary access to international markets and international dominance. The primitive trade theory, which was well received and propagated for many reasons, became fashionable in an era of aggression to acquire bullion (commodity money) and power.17

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  International Economics

  • Dominick Salvatore(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  27 PA R T 1 International Trade Theory Part One (Chapters 2–7) deals with international trade theory. It starts with the expla-nation of the important theory of comparative advantage in this chapter (Chapter 2), it examines the basis for and the gains from trade in Chapter 3, and it formalizes the discussion of how equilibrium relative prices are determined for internationally traded goods and services in Chapter 4. The Heckscher–Ohlin theory of interna-tional trade and results of empirical tests of the theory are presented in Chapter 5. Chapter 6 deals with important new and complementary trade theories, which base trade on economies of scale and imperfect competition, and Chapter 7 deals with the relationship between international trade and economic growth. 29 C H A P T E R 2 The Law of Comparative Advantage L E A R N I N G G O A L S After reading this chapter, you should be able to: • Understand the law of comparative advantage • Understand the relationship between opportunity costs and relative commodity prices • Explain the basis for trade and show the gains from trade under constant cost conditions 2.1 Introduction In this chapter, we examine the development of trade theory from the seventeenth cen-tury through the first part of the twentieth century. This historical approach is useful not because we are interested in the history of economic thought as such, but because it is a convenient way of introducing the concepts and theories of international trade from the simple to the more complex and realistic. The basic questions that we seek to answer in this chapter are: 1. What is the basis for trade and what are the gains from trade ? Presumably (and as in the case of an individual), a nation will voluntarily engage in trade only if it benefits from trade. But how are gains from trade generated? How large are the gains, and how are they divided among the trading nations? 2.

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  International Economics

  • Dominick Salvatore(Author)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  27 PA R T 1 International Trade Theory Part One (Chapters 2–7) deals with international trade theory. It starts with the expla- nation of the important theory of comparative advantage in this chapter (Chapter 2), it examines the basis for and the gains from trade in Chapter 3, and it formalizes the discussion of how equilibrium relative prices are determined for internationally traded goods and services in Chapter 4. The Heckscher–Ohlin theory of interna- tional trade and results of empirical tests of the theory are presented in Chapter 5. Chapter 6 deals with important new and complementary trade theories, which base trade on economies of scale and imperfect competition, and Chapter 7 deals with the relationship between international trade and economic growth. 29 C H A P T E R 2 The Law of Comparative Advantage L E A R N I N G G O A L S After reading this chapter, you should be able to: • Understand the law of comparative advantage • Understand the relationship between opportunity costs and relative commodity prices • Explain the basis for trade and show the gains from trade under constant cost conditions 2.1 Introduction In this chapter, we examine the development of trade theory from the seventeenth cen- tury through the first part of the twentieth century. This historical approach is useful not because we are interested in the history of economic thought as such, but because it is a convenient way of introducing the concepts and theories of international trade from the simple to the more complex and realistic. The basic questions that we seek to answer in this chapter are: 1. What is the basis for trade and what are the gains from trade? Presumably (and as in the case of an individual), a nation will voluntarily engage in trade only if it benefits from trade. But how are gains from trade generated? How large are the gains, and how are they divided among the trading nations? 2.

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  Foundations of International Political Economy

  • Matthew Watson(Author)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  Conclusion In neoclassical economics, trade is the outcome of a natural propensity to exchange, and all exchange entails the development 224 Foundations of International Political Economy of market relations based strictly on the principle of utility-maximization. In consequence, trade is assumed to provide a context in which all participants in the trading relation, driven ostensibly by innate characteristics, seek only to do what is best for themselves. The campaign for fair trade, by contrast, attempts to link consumers and producers at a moral level that transcends the ethics of pure self-interest. It appeals to individual subjectiv-ities constructed on ideas of what it is best to do to further the provisioning needs of society (i.e., an oikonomic decision based on a deontological rationality), rather than on ideas of what it is best to do for oneself (i.e., a chrematistic decision based on an instrumental rationality). However, the purchase of fairly traded goods remains a strictly peripheral economic activity. Such has been the incorporation of the orthodox economics worldview into daily life that the image of consumption as a utility-maximizing practice remains dominant. For most individuals living within societies in which the ideology of consumerism is an established part of the socialization structure, utility-maximization is truly entrenched as a primary habit of thought. The increasing visibility of fair trade products provides the means of alternative habitual practices based on alternative habits of thought, but such habits are distinct from the behavioural norms of a pure consumerist society. In order to challenge those norms, it is first necessary to challenge the assumptions about human nature on which they are founded. The campaign for fair trade attempts to do this by transcending the anonymity of most trading relations.

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  The Science of Economic Development and Growth: The Theory of Factor Proportions

  The Theory of Factor Proportions

  • C.C. Onyemelukwe(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  5 International Trade Versus Economic Development and Growth This chapter examines the contribution, if any, international trade can make to economic development and growth. Trade: Comparative Advantage

  Most economists support trade and regard it as an important vehicle for economic development and growth. In general, trade is supposed to allow each country to specialize in those things it does best and let others provide it with those things in which it is not best.

  In order for trade to pass the test as a vehicle of economic development and growth, it is necessary that the definition of “best” and the criteria for selecting those things a country does best have valid scientific credentials and that when countries trade on this basis they do in fact witness growth.

  The essential concept that has dominated economic history in this analysis is that of comparative advantage. Krugman and Obstfeld quoted Samuelson as having described comparative advantage as the best example known of an economic principle that is “undeniably true.”1 A country is said to have a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries. David Ricardo’s idea of comparative advantage was based on international differences in productivity of labor. So a country was best at producing a good if the labor needed to produce it there was less than anywhere else. Because any economy has limited resources, it is argued that there are limits on what it can produce. The total labor in the economy is said to set the limits of production. In the Ricardian model, it is claimed that a country will, in a trade-off, produce those things in which the prices are equal to their opportunity cost and the relative prices of goods are equal to their relative labor requirements.

  There are already problems here. Ricardo did not concern himself with how the goods he was talking about are made. Each of them requires a certain combination of capital, material, and labor to produce. It is obvious that for the unit of goods he has in mind, the one in which the labor proportion is least, will be said to have been produced with less labor and so come out on top in terms of Ricardo’s comparative advantage. It seems that the Ricardian model is biased toward techniques requiring low labor input techniques. As we have already shown, however, a country’s growth potential is maximized when the factor proportions of all activities are equal to the economy’s factor endowments, and what is required is equal factor proportions for all activities. Whereas in the Ricardian model, which assumes an economy is unbalanced, labor supply is said to place a limit on the economy’s production, in the new economy we have in mind, labor does not set a limit because the factor proportions, from which production techniques are determined, are based on the economy’s supply of labor.

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  Economic Development and Environmental Protection

  Economic Pursuit of Quality

  • Thomas Michael Power(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Clearly the location decisions of households have a very real impact on the location of economic activity. People do not just follow jobs. Economic activity, ultimately, must follow people, because they represent both the labor force and the market for products. This makes people’s locational preferences a central force in determining the geographic pattern of economic activity.

  9. Defining the Economic Base

  The economic-base model has one more intractable problem: specifying the basic economic activities. Without completing that step empirically, we have no explanation of anything. We have to be able to specify which economic activities are the “primary” activities that supposedly drive all others in the local economy.

  Often this problem is solved intuitively by simply specifying those industries which obviously produce for export: manufacturing, agriculture, and mining. To these are added “autonomous” inflows of income from federal spending, major construction projects, and income earned outside the local economy. All other economic activities, such as services, retail and wholesale trade, local construction, and local government, are labeled derivative or secondary.

  But this usually breaks down very quickly. Some manufacturing, agricultural, and mining production may well be for the local market, not for export. In addition, an area may be a regional trade center or tourist attraction, and part of the spending on services and retail and wholesale trade may not be local in origin. These industries may actually be part of the economic base.

  That means that all economic activities are partly basic and partly derivative. But how much of each? Two approaches have been taken to answering this question. One method assumes that all regions have similar consumption patterns per capita. National averages are used to establish how much of the dollar value of each good and service is “needed” to serve the local population. The value of all production in excess of this average is assumed to be exported and to be part of the economic base. Besides assuming that all areas have identical consumption patterns, this approach also assumes that all areas have identical productivity and that areas do not both export and import the same type of good or service. None of these are safe assumptions. Use of this approach has led to clearly spurious results (Gibson and Worden, 1981).

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