International trade theory Essay Example | Topics and Well Written Essays - 1500 words

International trade theory - Essay Example Economists beginning from the age of Adam Smith nevertheless, have vehemently refuted this theory and established the concept of comparative advantage which could arise only when the scope of international trade is open. Comparative advantage theory which is widely followed today states that factors of production are not available uniformly around the world. It is wise for a nation not to invest in producing all its needs; rather it could specialise in the production of the good which could be produced most efficiently and at the cheapest rates (Peng, 2008, p. 127). This is the innate strategy being followed by most successful nations in the world today. Hence, it could be claimed that mercantilism is a bankrupt theory that has no place in the modern world. Answer to Question 2 Free trade is an economic phenomenon which supports an unbarred flow of goods and services across international boundaries. Since there is no government intervention in this case, the actual demand and supply positions of the commodity in question is reflected through its market price. Since there are no mark ups to prices, such a policy is advantageous for the producers as well as consumers of the concerned commodity. However, government intervention could be regarded as necessary in case of certain exhaustible resources whose supply needs to be rationed to guarantee future consumption as well. Such a restriction cannot be imposed in situations where free trade exists. A good example is that of oil prices which had been at pretty low rates prior to 1971, when these values were guided by market mechanism. However, concerns about the precious resources being replenished compelled the World Trade Organisation to sanction its restrictive use. Answer to Question 3 There has been an increasing tendency among developed nations to assume a protectionist position in many aspects of international trade. Many of them who had previously sought the services of less developed or emerging nations to c ater to the needs of their residents, have turned dead against such a strategy, posing a view that such a mindset could hamper employment opportunities in the recipient nation. They have termed it as â€Å"unfair† import competition due to the potential loss of jobs that such practice is leading to. Such a standpoint however has differentiated impacts upon various sections of the recipient nation. (a) It might be of high interest for the union houses who often adopt practices to apparently pacify the workers and show them the former’s alignment to them. (b) The people who are represented by the unions might be benefitted if the national government adopts such policies, since in the short run, they would be rewarded with higher employment opportunities. (c) The nation however, is likely to land up in a worse situation since they have to subsidise the companies which adhered to such practices. Even if they decide not to fund their needs, they would be in an inferior posi tion given that the companies no longer reap as wide a profit margin as before which reduces the national income statistics. Answer to Question 4 A free-trade regime had been supported by Ricardian economic theory after David Ricardo pointed out the scope of comparative advantage that partner