Globalization and International trade MGT/448

Globalization _MGT/448

Globalization and International Trade

The Asian Development Bank defines globalization as, "…a process of economic integration of the entire world through the removal of barriers to free trade and capital mobility, as well as through the diffusion of knowledge and information. It is a historical process moving at different speeds in different countries and in different sectors. One of the results is that firms, whose output was previously significantly more limited by the size of their domestic market, now have the chance to reap greater advantages from economies of scale by "going global." (Asian Development Bank, n.d.).

There are several theories that support the concept of globalization such as the Theory of absolute advantage, the theory of comparative advantage, and the Heckscher-Ohlin theories are a few of these concepts.

The theory of absolute advantage was originally proposed in 1776 by Adam Smith.

Smith Street, Warwick - no's 55 to 61 Smith Street

English: An example of absolute advantage.

Globalization

Smith's theory was the first to explain the benefit of free trade. Smith felt that the hand of the market mechanism, rather than government policy, should determine a countries imports and exports (Hill, 2009, p.168). Free trade is achieved when a government does not influence trade through quotas or duties. Theory of absolute advantage, "…suggests that a country should specialize in producing goods in areas where it has an absolute advantage and import goods in areas where other countries have absolute advantages". (p. 195)

The theory of comparative advantage, building on Smith's theory, David Ricardo advanced the intellectual theory for unrestricted free trade by suggesting that…" it makes sense for a country to specialize

in producing those goods that it can produce most efficiently, while buying goods that it can produce relatively less efficiently from other countries-even if that means buying goods from other countries that it...