Theory of International Trade

Summary

This video delves into the foundational theories of international trade, focusing on the concepts of absolute and comparative advantage. It explains how these principles justify the existence of international trade and the formation of the World Trade Organization (WTO). The script provides a basic understanding of trade theory, highlighting the efficiency gains from countries producing and trading goods they are most efficient at, leading to a more productive global economy. It also touches on trade liberalization and the WTO's efforts to reduce trade barriers, aiming for frictionless trade.

Takeaways

• 🌐 The video introduces the theory of international trade, focusing on the concepts of absolute and comparative advantage as foundational to understanding international trade law and the purpose of the World Trade Organization (WTO).
• 📚 The script provides a basic understanding of international trade theory, setting the stage for future lessons without delving into more advanced subjects.
• 💡 The concept of absolute advantage, proposed by Adam Smith, suggests that states and firms should produce goods more efficiently than their competitors, leading to a more productive economy.
• 🔄 Absolute advantage implies that it is more efficient to import goods produced more efficiently elsewhere rather than attempting to produce all goods domestically.
• 🔄 Comparative advantage, as argued by David Ricardo, states that countries should produce goods at a lower opportunity cost relative to others, promoting specialization and trade.
• 🌟 Both absolute and comparative advantages are used to justify the existence of international trade and the benefits of trade integration between countries.
• 🏭 The script emphasizes the importance of productivity and efficiency in an economy, suggesting that specialization in production leads to maximum efficiency.
• 🔄 The idea of trade liberalization is to remove trade restrictions, such as tariffs and subsidies, to facilitate frictionless trade and promote economic efficiency.
• 🌍 The historical development of the WTO is highlighted, showing its role in reducing tariff barriers through various negotiation rounds to achieve more liberal trade.
• 🛑 The script discusses the importance of minimizing trade barriers, both de facto and de jure, to ensure the smooth functioning of international trade.
• 📈 The overall goal of international trade law, as implied in the script, is to enable trade with as few barriers as possible, aiming for an efficient international economy.

Q & A

What is the main focus of the video on International Trade Law?

The main focus of the video is to discuss the theory of international trade, specifically the concepts of absolute and comparative advantage, and how these concepts set the stage for understanding international trade law and the purpose of the World Trade Organization.

Why are the concepts of absolute and comparative advantage important in international trade?

The concepts of absolute and comparative advantage are important because they encapsulate the fundamental reasons for engaging in international trade, explaining why it is beneficial for countries to specialize in producing certain goods and services and trade with others.

What does the theory of absolute advantage propose?

The theory of absolute advantage, proposed by Adam Smith, suggests that states and firms should produce only the goods which they can produce at a more efficient rate than their competitors, implying that it is more productive to specialize in areas of efficiency and trade for the rest.

How does the theory of comparative advantage differ from the theory of absolute advantage?

Comparative advantage focuses on the opportunity cost of production. A country has a comparative advantage in producing a good if it can produce that good at a lower opportunity cost relative to other goods compared to other countries, as argued by David Ricardo.

What does the concept of opportunity cost mean in the context of comparative advantage?

In the context of comparative advantage, opportunity cost refers to the value of the next best alternative that is foregone to produce a good. A lower opportunity cost implies that a country is more efficient in producing a particular good compared to other countries.

Why is trade liberalization a goal in international trade law?

Trade liberalization is a goal in international trade law because it aims to reduce or remove barriers to trade, such as tariffs and subsidies, to promote more efficient and frictionless trade between countries.

What role does the World Trade Organization (WTO) play in international trade?

The WTO plays a crucial role in establishing and maintaining a system of international trade that operates with as few barriers as possible, facilitating trade liberalization and the removal of trade restrictions.

How does the process of trade liberalization contribute to the efficiency of the international economy?

Trade liberalization contributes to the efficiency of the international economy by allowing countries to focus on producing goods and services where they have a comparative advantage, and then trade these efficiently with other countries, maximizing overall productivity.

What are some of the barriers that trade liberalization seeks to remove?

Trade liberalization seeks to remove barriers such as tariffs, quotas, subsidies, and non-tariff barriers, which can hinder the free flow of trade between countries and reduce economic efficiency.

How have historical developments in the WTO contributed to trade liberalization?

Historical developments in the WTO have included multiple rounds of negotiations aimed at reducing tariff barriers and other trade restrictions, progressively moving towards a more liberal and open international trade environment.

What is the significance of the concept of 'frictionless trade' in the context of international trade law?

The concept of 'frictionless trade' signifies an ideal state of international trade where transactions occur without any barriers or delays, which is a goal of international trade law to maximize efficiency and productivity in the global economy.

Outlines

00:00

📚 Introduction to International Trade Theory

The script introduces the concept of International Trade Law and sets the stage for future lessons by discussing the fundamental theories of international trade, specifically absolute and comparative advantage. It emphasizes the importance of these theories in understanding the purpose of international trade and the reasons behind importing goods and services from abroad. The video aims to provide a basic theoretical foundation for understanding international trade law and the establishment of the World Trade Organization (WTO). It mentions the historical contributions of economists Adam Smith and David Ricardo, who proposed the theories of absolute and comparative advantage in the 1800s, as a justification for the existence of international trade and deeper trade integration between countries.

05:00

🌐 The Concept of Absolute and Comparative Advantage

This paragraph delves deeper into the theories of absolute and comparative advantage, explaining that according to Adam Smith's theory of absolute advantage, states and firms should focus on producing goods more efficiently than their competitors. It suggests that if a country or firm is more productive in certain goods, it should produce those and import the rest, leading to maximum efficiency in the economy. David Ricardo's theory of comparative advantage is then introduced, stating that countries should produce goods where they have the lowest opportunity cost, resulting in a more efficient international economy. The paragraph discusses the implications of these theories for international trade, advocating for trade liberalization and the removal of trade barriers such as tariffs and subsidies to achieve frictionless trade. It also touches on the historical development of the WTO and its efforts to reduce tariffs through negotiation rounds, aiming for a liberalized trade environment.

Keywords

💡International Trade

International Trade refers to the exchange of goods and services between different countries. It is the core theme of the video, which discusses the theory and practice of trade between nations. The script mentions international trade as a means to achieve maximum efficiency and productivity by allowing countries to specialize in producing goods they are best at, and then trade for the rest, exemplified by the concept of comparative and absolute advantage.

💡Absolute Advantage

Absolute Advantage is a concept proposed by Adam Smith, which suggests that a country or firm should produce goods that they can produce more efficiently than their competitors. In the script, it is used to explain why certain countries might choose to focus on producing specific goods rather than attempting to produce everything themselves, leading to more efficient economies.

💡Comparative Advantage

Comparative Advantage is a theory introduced by David Ricardo, which posits that a country has an advantage in producing a good if it can produce it at a lower opportunity cost compared to other countries. The script explains that this concept is crucial for understanding why countries engage in international trade, as it allows each country to specialize in producing what they are most efficient at, and then trade for other goods.

💡Opportunity Cost

Opportunity Cost is the cost of forgoing the next best alternative when making a decision. In the context of the video, it is used to describe the trade-off involved in producing one good over another. The script mentions that a country has a comparative advantage in producing a good if it can do so at a lower opportunity cost, which is central to the theory of comparative advantage.

💡Productivity

Productivity refers to the efficiency with which goods and services are produced. The script discusses how focusing on producing goods with absolute or comparative advantage can increase a country's productivity, as it allows for specialization in areas where they are most efficient, thus maximizing output and economic growth.

💡Trade Liberalization

Trade Liberalization is the process of reducing or eliminating trade barriers such as tariffs and subsidies to promote free trade. The script explains that trade liberalization is an important goal of international trade law and the World Trade Organization (WTO), aiming to facilitate frictionless trade and increase economic efficiency globally.

💡Tariffs

Tariffs are taxes imposed on imported goods, which can create a price advantage for domestically produced goods. The script discusses tariffs as a type of trade barrier that the WTO has historically worked to reduce through various negotiation rounds, in the pursuit of more liberalized trade.

💡World Trade Organization (WTO)

The World Trade Organization (WTO) is an international organization that regulates trade between nations. The script describes the WTO as being established to facilitate international trade by setting rules and working towards reducing trade barriers, which is essential for understanding the role of international trade law.

💡Economic Efficiency

Economic Efficiency refers to achieving the best possible allocation of resources to produce the goods and services that society wants. The script emphasizes the importance of economic efficiency in the context of international trade, where countries focus on producing what they are best at and trading for the rest to optimize global resource allocation.

💡Specialization

Specialization is the process of focusing on a particular area of production or expertise. The script explains that specialization is a key outcome of international trade theory, where countries specialize in producing goods they have a comparative or absolute advantage in, leading to increased productivity and efficiency.

💡Trade Integration

Trade Integration refers to the process of increasing the interconnectedness of economies through trade. The script mentions trade integration as a symbolic representation of the theories of comparative and absolute advantage, where deeper trade ties between countries can lead to more efficient economies and global economic growth.

Highlights

Introduction to International Trade Law and the importance of understanding the theory of international trade.

Exploration of the concepts of absolute and comparative advantage as foundational to international trade theory.

The significance of comparative advantage in justifying the existence of international trade and its role in economic efficiency.

Explanation of absolute advantage theory by Adam Smith, emphasizing efficient production of goods.

Discussion on the benefits of importing goods from abroad based on efficiency rather than domestic production.

The idea that productivity within an economy is enhanced by focusing on goods one can produce most efficiently.

Comparative advantage defined as producing goods at a lower opportunity cost relative to others in the market.

David Ricardo's insights on why countries engage in international trade based on comparative advantage.

The argument that countries should focus on producing and exporting goods where they have a comparative advantage.

The concept that international trade allows for the most efficient allocation of resources and production.

Importance of trade liberalization in reducing barriers and promoting frictionless trade.

Historical development of the WTO and its role in removing tariff barriers through negotiation rounds.

The goal of international trade law to facilitate trade with minimal barriers for economic efficiency.

The process of trade liberalization, including the removal of subsidies and tariffs, to achieve liberal trade.

The role of international trade in increasing productivity and the rationale behind the establishment of the WTO.

The overarching aim of international trade law to ensure trade takes place with as few restrictions as possible.

Transcripts

welcome back everybody to International

Trade law in this video what we're going

to do is talk a little bit about the

theory of international trade talking

about this idea of absolute and

comparative advantage and what this

really does is it sets the scene for

what we're going to be talking about in

future lessons time because the idea of

comparative advantage is fundamentally

and the idea of absolute Advantage these

are fundamentally ideas that really

encapsulate the concept of international

trade and the purpose of having

International Trade the reason why we

have the the import of goods and

services from abroad versus making and

doing everything ourselves there's a

reason why comparative advantage

actually uh works and why comparative

advantage confers onto us uh this idea

that international trade as as a result

works so this is really talking a little

bit about International Trade Theory um

we're not going to spend too much time

looking at International Trade Theory

because there of course there are more

advanced um uh more advanced subjects

more advanced theories on this issue

we're just going to talk about the basic

understanding of international trade uh

from a theoretical perspective as a

basic foundation for our understanding

of international trade law and the law

of the WTO and the and why the World

Trade Organization is established in the

way that it is we'll be examining ideas

relating to International Trade um

specifically the concepts of comparative

advantage as well as absolute advantage

to very important quite early on

principles that confer onto US

conceptions of international trade that

we can then as a result of which build

from the theory to the substantial

doctrinal analysis of international

trade law so the actual looking at the

law

itself so theories of trade are

particularly interesting when it comes

to essentially trying to justify the

existence of international trade and

from a theoretical perspective the

concept of having deeper trade

integration between countries is

symbolic of this Theory these theories

should I say in plural that have been

presented by economists such as Adam

Smith and David Ricardo so these are

quite old economists that were writing

in the 1800s for example and these were

the theories of comparative and absolute

Advantage fundamentally according to the

theory of absolute advantage this is a

theory which was proposed by Adam Smith

one of the earliest economists um in

Academia uh fundamentally States and

firms ought to produce only the goods

which they have the ability to produce

at a more efficient rate than their

competitors what does this mean well

let's assume that there is a whole host

of different Goods um that we uh want

and need and demand for for for for

basic day-to-day living now there are

really two ways in which we can actually

get access to these Goods we could as

the United Kingdom for example or the

United States or France or whatever

country you're coming from we could

produce them ourselves and produce all

these Goods ourselves in inhouse within

the within the state or we could import

them from uh abroad the idea of absolute

Advantage is suggesting that if you have

an advantage if you are more efficient

at produc producing Goods um than your

competitors whether this be States or

whether it be firms then theoretically

it is easier and it makes more sense

there is less friction in just allowing

the uh the the the production of those

goods abroad and then importing them

rather than people producing them

themselves it ties into the idea of

productivity within an economy where

essentially the basic economic uh in a

basic economic environment it is more

more efficient to produce only those

goods that you can produce more

efficiently than your competitors rather

than trying to produce everything else

it seems to be the case that you would

find that states or companies or firms

are more productive and more efficient

at producing different things so rather

than producing everything yourself why

don't we just produce the thing that we

are most efficient at producing and then

import and trade the rest and if

everybody does that then everybody is

essentially achieving this maximum

efficiency and then allowing um the

production of those things and then the

trade of those things uh internationally

hence why we then give rise to this

existence of international

trade comparative advantage is a little

bit different because what comparative

advances does car comparative advantage

does is tell you that you will have a

comparative advantage over others in a

market in producing a particular good if

they can produce said Goods good at a

lower opportunity cost relative to

others within uh within that said market

so David Ricardo for example argues that

um this idea of comparative advantage is

insightful into why it is the case that

countries will engage in international

trade essentially if you have a

comparative advantage over others when

it comes to the production of markets

then this it suggests therefore that

this lower opportunity cost implies that

you are going to um come out on top in

that economy and that eventually

everybody starts to sit into and start

to develop the kind of um the the the

kinds of goods that they are most

efficient at producing that they have a

comparative advantage in in producing

and then in doing so um we just trade

and so instead of everybody producing

their own things we just have um trade

internationally and making sure that the

international economy is the most

efficient essentially um if one country

has a comparative advantage in the

production of certain Goods than another

country then they should just produce

those goods and then export the rest for

profit and those people who do not have

a comparative advantage the people who

do not have that um comparative

advantage in producing these same Goods

shouldn't try to produce it themselves

they should just try to import because

then they would be wasting um economic

efficiency wasting economic output on

producing Goods that a different country

has a comparative advantage in the

result of this of course being that they

can then focus on the thing that they

have a comparative advantage over and

then export that so everybody is

essentially trying to um produce the

goods and services that they have a

comparative advantage in exporting it

and everybody is importing the rest

hence why we develop a a system of

international trade where this takes

place countries then create more

productivity by international trade and

this General undertaking therefore in

international trade is to make sure um

that it can take place with as few

barriers as

possible and one of the ideas that we

are trying to achieve uh when we talk

about International Trade law is this

idea of ensuring as frictionless trade

as humanly possible making sure that

trade does not have these kinds of

barriers whether these barriers be de

facto whether they be just the resulting

um barriers that exist or deure whether

they are actually barriers that exist in

the law themselves all of which um

contributes to this process known as

trade

liberalization and the the process of

removing trade restrictions whether

these be subsidies whether these be

tariffs mainly tariffs a lot in a lot of

s in a lot of cases um uh the process of

removing those is known as trade

liberalization and when we look at the

sort of historical development of the

WTO we see the WTO goes through a

process of removing tariff barriers in a

number of different rounds of in rounds

of negotiations to eventually get to a

point where we have as few tariffs as

humanly possible and as liberal trade as

humanly possible