International trade theory

Essay by goosie_tangUniversity, Bachelor'sA-, April 2006

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Free trade refers to a situation where a government doesn't attempt to influence through quotas or duties what its citizen can buy from another country, or what they can produce and sell to another country.

The benefits of trade

The great strength of the theories of Smith, Ricardo, and HnO is that they identify with precision the specific benefits of international trade. Iceland can benefit from trade by exchanging some of the product that it can produce at a low cost for some products that it cannot produce at all. Thus, by engaging in international trade, Icelanders are able to add oranges to their diet of fish.

The theories of Smith, Ricardo and HO go beyond this commonsense notion, however, to show why it is beneficial for a country to engage in international trade even for products it is able to produce itself. However the theories tell us that the a countries' economy may gain if its citizen buy certain products from other nations that could be produced at home.

The gains arise because international trade allows a country to specialize in the manufacture and export products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries.

Of course, this economic argument is often difficult for segments of a country's population to accept. With their future threatened by imports, US textile companies and their employees have tried hard to persuade the govt to limit the importation of textiles by demanding quotas and tariffs. Although such import controls may benefit particular groups, such as textile businesses and their employees or unprofitable steel mills and their employees, the theories of the above suggest that the economy as a whole is hurt by such action. Limits on import are often in the...