International Trade Theory

Summary

This presentation covers international trade theory, focusing on two types: descriptive and prescriptive theories. It explores mercantilism, a trade theory from the 1500s-1800s advocating for export surpluses to build national wealth, and contrasts it with Adam Smith's ideas from 'The Wealth of Nations,' which promotes free trade and specialization. The speaker also touches on absolute advantage, where countries excel in specific goods, and introduces David Ricardo's theory of comparative advantage, suggesting that even countries without absolute advantages can benefit from trade.

Takeaways

• 💡 Mercantilism emphasizes the importance of a country's wealth being measured in gold and surpluses.
• 📊 Mercantilism promotes a favorable balance of trade, where countries export more than they import.
• 🌍 Colonialism was tied to mercantilism, with European countries importing raw materials from colonies and exporting higher-value products.
• 📚 Adam Smith challenged mercantilism, redefining wealth as the total value of goods and services available to a country’s people.
• 🔄 According to Adam Smith, trade is always beneficial as both parties are better off after engaging in it.
• 💼 Specialization in production increases efficiency, leading to higher productivity, according to Adam Smith's theories.
• 📈 Adam Smith’s concept of absolute advantage suggests that countries should produce and trade goods where they hold the most efficiency.
• 🌦️ Natural advantages, such as climate and geographical location, can influence a country's ability to trade certain products effectively.
• 🏭 Acquired advantages, such as technology, design skills, or infrastructure, can also lead to trade benefits.
• 📉 David Ricardo expanded on Smith’s ideas with his theory of comparative advantage, which argues that even countries with no absolute advantage can benefit from trade.

Q & A

What are the two broad types of trade theories discussed in the presentation?

The two broad types of trade theories discussed are descriptive theories, which explain why trade occurs and the patterns of trade, and prescriptive theories, which give advice on how trade should be managed, including whether governments should control or influence trade.

What is mercantilism, and how does it define a country's wealth?

Mercantilism is a trade theory that was prevalent from the 1500s to the early 1800s. It defines a country's wealth by the amount of gold or surplus treasures it holds, with the belief that wealth accumulation strengthens national power, both economically and militarily.

According to mercantilism, what constitutes a 'favorable balance of trade'?

A 'favorable balance of trade' under mercantilism occurs when a country exports more than it imports, resulting in a trade surplus. This surplus is considered beneficial because it increases the country's wealth and strengthens its national power.

Why did Adam Smith argue against mercantilism in his book *The Wealth of Nations*?

Adam Smith argued against mercantilism by redefining wealth. He believed wealth was not based on government surplus, but on the total value of goods and services available to people. Smith emphasized that trade benefits all parties involved and should be unrestricted to maximize these benefits.

What is Adam Smith’s concept of specialization, and how does it relate to trade?

Adam Smith’s concept of specialization involves focusing on producing goods that a country can make more efficiently. By specializing, countries can increase productivity and gain from trade by exchanging goods they produce efficiently for goods produced more efficiently by other countries.

What is the difference between absolute advantage and comparative advantage?

Absolute advantage refers to a country's ability to produce certain goods more efficiently than others. Comparative advantage, as introduced by David Ricardo, suggests that even if a country has no absolute advantage, it can still benefit from trade by specializing in goods where it has a lower opportunity cost compared to other countries.

What are the two types of advantages that contribute to a country’s ability to trade?

The two types of advantages are natural advantages, which include factors like climate and natural resources, and acquired advantages, which include skills, technology, infrastructure, and business climate that are developed over time.

How do natural advantages like climate affect a country's trade patterns?

Natural advantages such as climate affect a country’s ability to produce certain agricultural products efficiently. For example, a tropical country might excel in growing bananas, while a colder region may focus on other goods, leading to trade based on these geographical factors.

What is an example of an acquired advantage in international trade?

An example of an acquired advantage is Switzerland’s expertise in watchmaking. This advantage is not based on natural resources or climate but on the country’s carefully developed design skills and reputation for precision over generations.

How does David Ricardo's theory of comparative advantage challenge the notion of absolute advantage?

David Ricardo’s theory of comparative advantage challenges the notion of absolute advantage by arguing that even if a country has no absolute advantage in any product, it can still benefit from trade. Trade occurs when countries specialize in goods where they have the lowest opportunity cost, ensuring mutual benefits from trade.