Theory of International Trade
Summary
TLDRThis 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
📚 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.
🌐 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.
Mindmap
Keywords
💡International Trade
💡Absolute Advantage
💡Comparative Advantage
💡Opportunity Cost
💡Productivity
💡Trade Liberalization
💡Tariffs
💡World Trade Organization (WTO)
💡Economic Efficiency
💡Specialization
💡Trade Integration
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
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