Topic
International Trade: Benefits, Consequences and Possible Drawbacks
Instructions
A) Review and critically examine the main international trade theories both classical and modern.
Show that you understand the theoretical basis of each and explain the reasoning which leads to
the predictions they make. How valid are these predictions in the light of contemporary
evidence and what are the limitations, if any, of each theory you are evaluating?
B) Over the last 3 to 4 decades international trade has grown much more quickly than the world
economy in general and most individual national economics in particular until the financial crisis
of 2008 when there was a reversal in growth until growth recovered in 2010. International trade
theory predicts that trading nations will benefit from international trade in terms of raising levels
of real income and prosperity and stimulating their economic growth. Evaluate the extent to
which this has happened supporting your answer with real world examples with which you are
familiar or have researched.
C) The expectation by economists is that international trade will stimulate economic growth of
the world economy and raise incomes of participating trading nation states has led to the
formation and expansion of the WTO designed to liberalize world trade. Trading Blocs such as the
EU, NAFTA and ASEAN promote free trade within the blocs but some protectionism from outside
. With reference to International theories identified in A) above are there any drawbacks and
limitations to the increased liberalization and expansion of free trade for trading nations? If so is
there a good case for protectionism in certain circumstances? If so explain in which
circumstances this may be preferred and if not explain why not.
Answer preview
Mercantilism came under criticism for its inability to foster economic growth, especially with the emergence of colonial powers. Smith developed the concept of absolute advantage anchored on the laissez-faire state theories (Smith, 1776). Absolute advantage theory was based on the premise that wealth of a nation can be examined from the lens of opportunity costs resulting from regulations that favours a county over another, taking away resources which could have benefited the country. Smith also applied the principle of opportunity costs in addition to specialization to trade policy at the international level. According to this theory, a country can benefit more by importing goods from a country that manufacture them more resourcefully, allowing the importing country to direct its resources to more efficient and productive industries.
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