Why Nations Trade
Why Nations Trade
Thesis: Why do nations trade? We will not attempt to argue for or against trade among nations, but rather analyze why a nation would want to trade at all. We will also discuss some of the laws and organizations that assist in international trade.
One early form of economic policy was known as mercantilism and dominated during the 16th and 17th centuries. The premise of mercantilism was to increase the strength of the state and promote national unity. Gold and silver represented wealth. Countries not rich in gold and silver mines relied on exports through foreign trade with government control. Adam Smith, who developed the free trade theory, pointed out that governmental regulations on trade actually reduced the wealth of nations. It prevented the nations from benefiting from a competitive cost advantage on purchases. With free trade, each nation could increase its wealth by exporting the goods it produced most cheaply and importing goods that were produced cheaper elsewhere. His theory was that each nation could specialize in the production and exportation of the goods over which it had an absolute advantage. This is the classical trade theory.
The modern trade theory is mainly concerned with the analysis of the basis for trade and with accounting for differences in comparative advantage. The 20th century economists noted that the difference in the prices of final goods tend to reflect - not the differences in the productivity of resources, and unequal distribution of technologies and labor among nations like was thought under the classic theory - but rather the differences in the prices and availability of productive resources. They reasoned that countries specialize in the production and exportation of goods requiring large amounts of resources that they naturally possess, and import goods requiring large amounts of resources that are scarce.
Although most countries officially favor free trade, few countries have ever actually adopted a free trade policy. ****Discuss Free Trade****International trade policies and NAFTA ***
Some countries export only to expand their domestic market or to aid the depressed areas within their economy. Other countries depend on trade for a large portion of their national income. But trade in an international economy is essential for growth. Since 1960, trade has grown fifteen-fold, world economic protection has quadrupled; and the world per capita income has more than doubled. Trade helps nations grow and allows families throughout the world to live better lives....