Before there was theory . . . there was trade! One of the earliest of humankinds activities.
Trade is the buying and selling of goods and services across national borders. Why? Because, it is making both parties to any transaction better off.
Trade theories, in general, attempt to explain who trades how much of what with whom, and why . . . and at what price. But NO ONE THEORY explains all trade! A Statism or Mercantilism Perspective From the mid-16 th Century. A nations wealth depends on its accumulated treasure, basically GOLD!
Trade is win or lose; a zero-sum game. Conflict is the norm.
The interest of the State is dominant
Theory says you should have a trade surplus. (X >I) Maximize exports through Government subsidies. Minimize imports through tariffs and quotas.
Fit quite well with an age of exploration, colonialism, imperialism, and capitalism. Radicalism: Marxist and Dependency Perspectives Beginning with Marx et. al. in the mid-19 th century . . . A reaction to the industrial revolution
Inevitable conflict between capitalists and workers
Capitalism is inherently expansive, so conflict over resources is continuous and inevitable. The State will always support the owners of the means of production.
There is a profound North-South divide; a wealthy Northern Hemisphere seeking the continued dependency of the Southern Hemisphere
MNCs are modern day imperialists. The IMF, World Bank, WTO and other international actors protect the interests of the developed world and the owners of capital.
The Dominant Theory: Economic Liberalism Adam Smith: The wealth of (a) nation is based on the goods and services available to its people.
Capability of one country to produce more of a product with the same amount of inputs than another country.
Produce only goods where you are most efficient, trade for those where you are not efficient. Specialize. Trade between countries is, therefore, beneficial and markets will allocate goods and services.
Assumes there every country has an absolute advantage of some sort
No longer zero sum; everybody wins! 4-8 Theory of Comparative Advantage: David Ricardo (1817) A theory of RELATIVE advantage. Even if a country produces NOTHING more efficiently than someone else, both countries can STILL recognize gains from trade.
A nation should give up less-efficient (relatively) output to produce more efficient (relatively) output without regard to the ABSOLUTE advantage.
Makes better use of resources; potential world production is greater with unrestricted free trade than with restrictions on free trade.
Trade is a positive-sum game. Everybody wins again! Volume and Patterns of World Trade Today Trade has consistently grown faster than world output.
U.S., Germany, Japan, France, UK (and China) are among top merchandise exporters.
Trade between the worlds high-income economies accounts for roughly 60 percent of total world merchandise trade.
Two-way trade between high-income countries and low- and middle-income nations accounts for about 34 percent of world merchandise trade.
Intra-regional trade levels are high (67% in Western Europe, 49 % in Asia, 40% in N. America)
The Continuum of Trade All countries fall on a continuum of trade interdependencies
Trade relationships with a dominant partner can be beneficial.