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Introduction of International Trade

The exchange of goods or services along international borders. This type of trade allows for a greater competition and more competitive pricing in the market. The competition results in more affordable products for the consumer. The exchange of goods also affects the economy of the world as dictated by supply and demand, making goods and services obtainable which may not otherwise be available to consumersglobally.

International trade touches us all. We drink soda from cans made of aluminum mined in Australia, wear shoes made in Europe, eat fruit from South America, build machinery from steel milled in Asia, wear clothes made from African cotton, and live in homes built from North American wood sip tea from India. We take it for granted, yet before we can enjoy these products and materials, traders must negotiate prices and deliver the goods through a network of relationships that literally spans the globe.

1 Introduction of Mercantilism Mercantilism is an economic concept which believes that the wealth of a nation could only be achieved through governmentcontrols and regulation of trade. It was an economic system that was practised in the 16th to 18th centuries. the document stated. where a warning was put out for England not to impoverish itself and enrich strangers. A classical description of this approach could be seen in a statement contained in the document Discourse in the Common Weal of this Realm of England in 1549. The amount of capital. especially through the use of tariffs. This. and at the same time restricting French finance minister and mercantilist Jean-Baptiste Colbert served for over 20 years. represented by bullion (amount of precious metal held by the state). . is best increased through a balance of trade with large exports and low imports. Its use was favoured by writers such as Jean-Baptiste Colbert. The economic policy based on these ideas is often called the mercantile system. Mercantilism suggests that the government should advance these goals by playing an active.Theories of International Trade Mercantilism Mercantilism is the economic theory holding that the prosperity of a nation depends upon its supply of capital and that the global volume of trade is unchangeable. who at a time served as the French Finance Minister. protectionist role in the economy by encouraging exports and discouraging imports. The end game of this policy was to achieve a situation of wealth by increasing the amount of gold and silver trading in the mercantilist nation’s treasury. commerce and economic activities. could only be achieved by “not buying more from them than we sell to them”. The underlying principle of mercantilism was to achieve a positive balance of trade (trade surplus) by encouraging exports of home-made products and markedly restricting importation through imposition of tariffs and stringent regulation.

who were proponents of free trade or laissez-faire economic systems of trade. since the only way open to get wealth that could not be obtained by trade was to forcefully take it from another country. Combined with a deliberate government policy of a fixed exchange rate for the Chinese Yuan. Negotiations to get the Chinese government to open up its markets to foreign goods are yet to yield the desired results. and importation of gold and raw materials from these sources. the government’s exports have largely accounted for its $ 1 trillion foreign reserves and its massive trade surplus. and exporting same to markets in the Americas. A negative effect of mercantilism was that it encouraged plenty of warfare. Europe and Africa. Features of a Mercantilist Economy 1) Import prohibition of certain goods using imposition of high tariffs. China is another country where modern-day mercantilism is flourishing. 5) One-way trade with colonies. government legislation or very high taxes/import duties. Many analysts are also quick to point out that the colonization of territories like Africa and what constitutes Latin America and the West Indies can also be likened to a form of mercantilism. the US is one of China’s biggest debtors. Today. and prohibition of private accumulation. 3) Policies of nationalism. 4) Accumulation of assets in gold and silver. are indeed. use or export of these items. Even though the late 18th century is regarded widely as a period when mercantilism fell out of favour. After the declaration by Deng Xiaoping to his countrymen in the 80's that “to get rich is glorious”. critics are quick to point out that countries like Japan that rely heavily on exports for their revenue and which has taken steps like currency devaluation to achieve this aim. 2) A wide range of government subsidies on export industries to promote the country’s export-based policy.avenues through which these metals were exported. . the Chinese government led an industrial revolution that involved the setting up of industries to produce just about anything that could be produced. Mechanisms put in place to achieve this included the prohibition of transactions using these precious metals by private citizens. which has effectively kept the currency permanently undervalued when compared to Western currencies. Conquered territories were made to pay hefty tributes in gold and had their natural resources plundered. Mercantilism in today’s global economy Mercantilism was severely opposed by core capitalist proponents such as Adam Smith and Dave Ricardo. practising a modern form of mercantilism.

because the global economy would become stagnant if every country wanted to export and no one wanted to import. many people began to revolt against the idea of mercantilism and stressed the need for free trade. This type of system cannot be maintained forever. Definition of 'Mercantilism' Body of economics thought popular during the mid 16th and late 17th centuries. The main goal was to increase a nation's wealth by imposing government regulation concerning all of the nation's commercial interests. it exhorted governments to maintain surplus of exports over imports through tariffs (duties). thus increasing the national wealth. and unions demand control over imports through higher-duties to protect local jobs and industries. Mercantilism's demise was initiated by David Hume. It held that money was wealth. and other such measures. In more recent times.and Antonio Serra in Italy (1570-?). and other classical economist (see Classical Economics) who saw it as serving only the merchant class and argued that real wealth was to be equated with full employment through greater production of goods and services. After a period of time. See also laissez faire economics. Supported by economists such as Gerard de Malynes (1586-1641). Jean Baptiste Colbert (1619-83) in France .Investopedia explains 'Mercantilism' This approach assumes the wealth of a nation depends primarily on the possession of precious metals such as gold and silver. and Sir Thomas Mun (1571-1641) in the UK. Adam Smith (who coined the term). politicians. . colonialism.We have also seen failed attempts at mercantilism by countries like Nigeria which are primarily import oriented. It was believed that national strength could be maximized by limiting imports via tariffs and maximizing exports. the mercantilism dogma was revived by the UK economist John Maynard Keynes (1883-1946) when he stated that a surplus in balance-of-trade stimulates demand. accumulation of gold and silver was the key to prosperity. The continued pressure resulted in the implementation of laissez faire economics in the nineteenth century. Definition of 'Mercantilism' The main economic system used during the sixteenth to eighteenth centuries. When corporations. they are resorting to mercantilism. but which still have several import prohibitions without a concurrent increase in the production capacity of export-oriented industries to balance the equation. Edward Misselden (1608-54). and one nation's gain was another's loss.

. will there still be benefit to trade. There is a potential problem with absolute advantage. individual. because there are gains for both countries to an exchange.2 The theory that trade occurs when one country. but it is less efficient than (or has an absolute disadvantage over) the other nation in producing a second commodity B. Contrary to mercantilism Smith argued that a country should concentrate on production of goods in which it holds an absolute advantage. both countries can gain by each specializing in the production of the commodity at its absolute advantage where its resources are utilized in the most efficient way. company. the theory of comparative advantage. The theory of absolute advantage destroys the mercantilistic idea that international trade is a zerosum game. Introduction to Absolute Advantage theory The Scottish economist Adam Smith developed the trade theory of absolute advantage in 1776.Absolute Advantage Theory When one nation is more efficient than ( or has less absolute advantage over) another in the production of one commodity A. According to the absolute advantage theory. it should be allowed to flow according to market forces. No country would then need to produce all the goods it consumed. If there is one country that does not have an absolute advantage in the production of any product. A country that has an absolute advantage produces greater output of a good or service than other countries using the same amount of resources. Unlike mercantilism this theory measures the nation's wealth by the living standards of its people and not by gold and silver. company or country has an absolute advantage if its output per unit of input of all goods and services produced is higher than that of another entity producing that good or service. and will trade even occur? The answer may be found in the extension of absolute advantage. Smith stated that tariffs and quotas should not restrict international trade. international trade is a positive-sum game. Therefore. or region is absolutely more productive than another entity in the production of a good. A person.

Assuming that the employees of both parties are paid equally. can print 5 t-shirts or build 3 birdhouses an hour. Mike. she has an absolute advantage in both printing t-shirts and building birdhouses. Party B has an absolute advantage over Party A in producing widgets per hour. While there are possible gains from trade with absolute advantage. Scenario 2: Suppose Gina wasn't as agile with the hammer and could only make 1 birdhouse an hour. Mike on the other hand takes  . This is because Party B can produce twice as many widgets as Party A can with the same number of employees. Example 1[edit source | editbeta] Party B has the absolute advantage. Example 2[edit source | editbeta] You and your friends decided to help with fundraising for a local charity group by printing t-shirts and making birdhouses.   Party A can produce 5 widgets per hour with 3 employees. Comparative advantage focuses on the range of possible mutually beneficial exchanges. can print 3 t-shirts an hour or build 2 birdhouses an hour. Gina. Your other friend. Smith also stated that the wealth of nations depends upon the goods and services available to their citizens.  Scenario 1: One of your friends. Party B can produce 10 widgets per hour with 3 employees. but she took a sewing class and could print 10 t-shirts an hour. Because your friend Gina is more productive at printing t-shirts and building birdhouses compared to Mike. rather than their gold reserves. the gains may not be mutually beneficial.Origin of the theory The main concept of absolute advantage is generally attributed to Adam Smith for his 1776 publication An Inquiry into the Nature and Causes of the Wealth of Nations in which he countered mercantilist ideas. Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage.

woodworking and so he can build 5 birdhouses an hour. but he doesn't know the first thing about making t-shirts so he can only print 2 t-shirts an hour. While Gina would have the absolute advantage in printing shirts. Mike would have an absolute advantage in building birdhouses. .

Referances 1 - 2 -inInternational Economics. Dominick Salvatore.pp37-39)(Ref:Lecture Note Week 1) .