Classical Theories Describing Trade Between Different Nations Economics Essay

Classical Theories Describing Trade Between Different Nations Economics EssayThe pursuance essay encompasses a review based on two of the popular Classical Theories describing the fundamental basis for trade between different nations. The foremost bankrupt comprises of a treatise about the ways in which Ricardos lawfulness of comparative reward is superior to Smiths theory of absolute expediency. The middle authority is a discussion all over the gains from trade arising as a result of comparative reinforcement. The final part talks about ways in which a slight in effect(p) terra firma grass export anything to a snatch nation that is more efficient in production of all commodities.In what way was Ricardos law of comparative advantage superior to Smiths theory of absolute advantage?It is imperative to understand Ricardos law and Smiths theory in order to be able to highlight superiority of actor over the later.Smiths theory of absolute advantage declares that A country gain grounds by producing only those products in which it has absolute advantage, or can prove using little resources than an different country. (Cavusgil, Knight, Riesenberger, 2008 )Adam Smith was of the view point that since one nations import is the export of a nonher nation so it was not viable for all countries to obtain wealthy concurrently by following mercantilist view. He asserted that if all countries were to focus only on products in which they rent absolute advantage, they could export them to other countries and in return import those products in which they do not receive absolute advantage in producing. He believed that this free trade will benefit all countries simultaneously.Ricardos law of comparative advantage states that It can be beneficial for two countries to trade without barriers as long as one is more efficient at producing goods or services needed by the other. What matters is not the absolute cost of production, but rather the comparative effic iency with which a country can produce the product. ( Cavusgil, et.al.2008)David Ricardo argued that internationalistic trade will benefit countries even if one nation has an absolute advantage in production of all commodoties. He believed that if a country could produce a product more efficiently than a country which was self sufficient in producing the same product but with less efficiency then it is better to import that commodity from the country producing it more efficiently.Though Smith successfully established the case for free trade, he did not develop the concept of comparative advantage. Because absolute advantage is determined by a simple comparison of wear out productivities, it is possible for a nation to take on absolute advantage in nothing. (www.encyclopedia.com)The higher up excerpt sooner answers the way in which Ricardos law has an advantage over the Smiths theory. The key point of the selection is quite evident What if a nation has absolute advantage in nothi ng? Does it stop importing products from other nations because it has nothing to export?This is where David Recardos law of comparative advantage is superior to Smiths theory. It is more comprehensive in terms of associating specialization with opportunity cost. Unlike Smiths theory which is completely based on absolute advantage, Ricardos law of comparative advantage generates hope for nations that are technically on the back foot by entailing that they can involve in international trade even if their labor output in all commodities is less than that of a developed country.In todays scenario, an example could be of Pakistan exporting cotton products to join States and importing military guns, tanks and missiles. (http//internationaltrade.suite101.com/) unite States can produce cotton products too but relatively less efficiently than Pakistan. On the contrary, United States has a relative advantage in make military products. According to Ricardos law of comparative advantage, Unit ed States is benefitting from Pakistans efficiency in making cotton products whereas Pakistan is benefitting from United Statess efficiency in making military products.The above example justifieses the win-win situation as was proposed by Ricardo.If United States was to choose to grow cotton on its land and make its own cotton products, it could possibly have done that, less efficiently though. This signifies that if Smiths theory was implemented, Pakistan would have nothing left to trade with the United States.How do gains from trade arise with comparative advantage? ground on Ricardos law of comparative advantage, gains from trade arise in terms of increased world output for any commodities that any two countries import and export from each other. No one country wastes extra time and money producing the same product less efficiently which another country can produce more efficiently.Let us assume that Country A produces a commodity more efficiently and therefore has a relative/com parative advantage over Country B for that commodity which might be able to produce that same commodity but less efficiently. Suppose Country A exports its commodity to Country B in exchange for importing something which it cannot produce as efficiently. Both Countries A and B hired comparative advantage to crush what they wanted. Both countries gained from each others area of expertise. This assumption outlines outcome of Ricardos law of comparative advantage.Another example could be of trade between Saudi Arabia and Australia. Both nations utilize their natural advantages to gain from trade. Saudi Arabia has ample Oil which it exports to Australia. In return it imports Bauxite (finest quality of coal) from Australia. In this way, both nations are benefitting by exchanging what they have in repletion with what they do not have or which may be there but more difficult to extract. Australia might be having reservoirs of Oil available darksome within its Oceanic boundaries but the cost of extracting them would be too high.Labor costs are much higher in developed countries such as United States. These countries mostly hire government owned or government supported firms providing cheap skillful labor in developing countries such as China to get their task accomplished. What did they each gain from trade arising with comparative advantage?Developed countries gain Cheap labor hence more profit. create countries gain Employment.So it becomes a win-win situation. United States gets its product manufactured at a much lower cost than it would have back in United States. China gets employment.How can a nation that is less efficient than another nation in the production of all commodities export anything to the second nation?Ricardos law of comparative advantage demonstrates that a nation that is less efficient than another nation in the production of all commodities can still export to the second nation. That is because what matters is not the absolute cost of produ ction, but rather the ratio between how easily the two countries can produce the products. (Cavusgil, et.al.2008)Ways in which Ricardos law plays its character reference in helping a less efficient nation export commodities to a more efficient nation have been discussed in the previous part of question.A less efficient nation can also export to the more efficient nation by implementing and incorporating competitive advantage in its international trade policies. A nation can attain competetive advantage by coming up with innovative advancements, by targeting industries for development, providing low-cost investment, reducing taxes, and by put in emerging technologies to take up the future. Policies should be encouraging for local and foreign investments such as tax free business in Dubai. industrial clusters should be promoted which often act as a nations export platform.Michael Porters famous Diamond Model outlines the way a country can increase its competetiveness( Cavusgil, Knig ht, Riesenberger, 2008, pp-104) closureAs is evident from the above essay, Ricardos law is superior from Smiths theory because it justifies that trade is still possible between two countries even if a country does dont have absolute advantage in anything. The above arguments also prove that comparative advantage is advantageous to both the trading nations as a result of utilizing relative advantage in import and export. Besides Ricardos law of comparative advantage, competetive advantage supported by Michael Porters Diamond Model can help a less efficient nation develop industrial clusters so as to be able to export to a more efficient nation.