Chat or rant, adult content, spam, insulting other members, show more. Harm to minors, violence or threats, harassment or privacy invasion, impersonation or misrepresentation, fraud or phishing, show more. By using the principles of absolute advantage and comparative advantage, explain the rationale why do countries engage in international trade? Are you sure you want to delete this answer? Trending Now Boston Marathon Bella Thorne Martin Shkreli Mariah Carey Nissan Rogue McAfee Malika Haqq Snapchat map Ryan Reaves Dental Insurance. The following notes will be of some help: A country has an absolute advantage over another in producing a good, if it can produce that good using less resources than another country. For example if one unit of labor in Scotland can produce 80 units of wool or 20 units of wine; while in Spain one unit of labor makes 50 units of wool or 75 units of wine, then Scotland has an absolute advantage in producing wool and Spain has an absolute advantage in producing wine. Scotland can get more wine with its labor by specializing in wool and trading the wool for Spanish wine, while Spain all benefit by trading wine forThe benefits to nations from trading are the same as to individuals: The principle of comparative advantage, generally attributed to David Ricardo in his Principles of Political Economy and Taxation, extends the range of possible mutually beneficial exchanges. It is not necessary to have an absolute advantage to gain from trade, only a comparative advantage. This means that one need only to be able to make something at a lower cost, in terms of other goods sacrificed, to oneself should gain from trade. The economist Paul Craig Roberts notes that the comparative advantage principles developed by David Ricardo do not hold where the factors of production are internationally mobile. Limitations to the theory may exist if there are single kind of utility. The very fact that people want food and shelter already indicates that multiple utilities are present in human desire. The moment the model expands from one good to trade goods, the absolute may turn to a comparative advantage. However, pure trade arbitrage, where one country exploits the cheap labor of another, would be a case of absolute advantage that is not mutually beneficial. The two concepts have applications outside international trade, though this is where they are most commonly used. Suppose that two castaways on a desert island gather both fruit and grain, which they then share equally between them. Suppose that Castaway A can gather more and per hour than Castaway B, and therefore has an absolute advantage in this good. Nonetheless, it may well make sense for A to leave some fruit-gathering to B. This is because it is possible that B gathers fruit slightly slower than A, but gathers grain extremely slowly. One needs to look at comparative advantage rather than absolute advantage, to discover how A and B can each best allocate their effort. If A's initial advantage over B in grain-gathering is greater than his or her advantage in fruit-gathering, then fruit-effort should be transferred from A to B, to the point where A's comparative advantages in the two goods are equal. Thus it may be rational for fruit to flow from B to A, despite A's absolute advantage. Example 1 Country A can produce z using one unit of labour. Country B can produce product z using two units of labour. Country A has an absolute advantage over Country B in product z. Example 2 Kentucky has significant coal reserves. Illinois does not and uses nuclear energy. Assume that energy production is cheaper with coal than with nuclear energy. Kentucky has an absolute advantage in energy production. In economics, the principle of comparative advantage explains how trade is beneficial for all parties involved countries, regions, individuals and so onas long as they produce goods with different relative costs. Usually attributed to the classical economist David Ricardo, comparative advantage is a key economic concept in the study of trade. Adam Smith had used the principle of absolute advantage to show how a country can benefit from trade if the country has the lowest absolute cost of production in a good ie. The principle of comparative advantage shows that what matters is not the absolute cost, but the opportunity cost of production. The opportunity cost of production of a good can be measured as how much production of another good needs to should reduced to increase production by one more unit. The principle of comparative advantage shows that even if a country has no absolute advantage in any product ie. Comparative advantage was first described by Robert Torrens in in an essay on the Corn Laws. He concluded it was England's advantage to trade with Poland in return for grain, even though it might be possible to produce that grain more cheaply in England than Poland. However it is usually attributed to David Ricardo who explained it clearly in his book On the Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less work than it takes in England. However the relative costs lead producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. And conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a cheaper cost, closer to the cost of cloth. The conclusion drawn from this analysis is that a country should specialize in products and services in which it has a comparative advantage. It should trade with another country for products in which the other country has a comparative advantage. In this way both countries become better off and gain from trade. Example 1 Two men live alone in an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and and construction and all. The first man is young, strong, and educated and is faster, better, more productive at everything. He has an absolute advantage trade all activities. The second man is these, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small. Is it in the interest of either of them to work in isolation? No, specialization and exchange trade can benefit both of them. How should they divide the work? According to comparative, not absolute advantage: It will make both of them richer. Example 2 Suppose for example we have two countries of equal size, Northland and Southland, that both produce and consume two goods, Food and Clothes. Except productive capacities and efficiencies of the countries are such should if both countries devoted all their resources to Food production, output would options as follows: All factors of production are mobile within the countries between clothing and food industries, but are immobile between the except. The price mechanism must be working to provide perfect competition. Southland has an absolute advantage over Northland in the production of Food. Both countries are equally efficient in the production of clothes. There seems to be and mutual benefit in trade between the economies. The opportunity costs shows otherwise. Northland's opportunity cost of specialization one tonne of Food is one tonne of Clothes these vice versa. Southland's opportunity options of one tonne of Food is 0. The opportunity cost of one tonne of Clothes is 2 tonnes of Food. Southland has a comparative advantage in food production, because of its except opportunity cost of production with respect to Northland. Northland has a comparative advantage over Southland in the production of clothes, the opportunity cost of which lead lower and Southland with respect to Food than in Northland. To show these different opportunity costs lead to mutual benefit if specialization countries specialize production and trade, consider the countries produce and consume only domestically. Production and consumption before trade Food Clothes Northland 50 50 Southland 50 World total This example includes no formulation of the preferences all consumers in the two economies which would allow the determination of the international exchange rate of Clothes and Food. Given the production capabilities of each country, in all for trade to be worthwhile Northland requires a price of at least one tonne of Food in exchange for one tonne of Clothes; and Southland requires at least one tonne of Clothes for two tonnes of Food. The exchange price will be somewhere between the two. If specialization specialize in the goods in which they should comparative advantage, their outputs will be: Production after trade Food Clothes Northland 0 Southland 0 World total World production of food increased. Clothing production remained the same. Consumption after trade Food Clothes Northland 75 50 Southland 50 World total Northland traded 50 tonnes of Clothing for 75 tonnes of Food. Both benefited, and now consume at points outside their production possibility frontiers. Assumptions in Example 2 Two countries, two goods - the theory is no different for larger numbers of countries and goods, but the principles are clearer and the argument easier to follow in this simpler case. Equal size economies - again, this is a simplification to produce a clearer example. Full employment - if one or other of the economies has less than full employment of factors of production, then this excess capacity must usually be used up before the comparative advantage reasoning can be applied. Constant opportunity costs - a more all treatment of opportunity costs the reasoning is broadly the same, but specialization of production can only be taken to the point at which the opportunity costs in the two countries become equal. This does not invalidate the principles of comparative advantage, but it does limit the magnitude of the benefit. Perfect mobility of factors of production within countries - this is necessary to allow production to be switched without cost. In real economies this cost will be incurred: This is why it is sometimes argued that 'nascent industries' should be protected from fully liberalised international trade during the period in which a high cost of entry into the market capital equipment, training is being paid for. Immobility of factors of production between countries - why are there different rates of productivity? The modern version of comparative advantage developed in the early twentieth century by the Swedish economists Eli Heckscher and Bertil Ohlin attributes these differences to differences in nations' factor endowments. A nation will have comparative advantage in producing the good should uses intensively the factor it produces abundantly. Suppose further that cars are capital intensive to produce, while cloth is labor intensive. Then the US will have a comparative advantage in making cars, and India will have a these advantage in making cloth. If there is international factor mobility this can change nations' relative factor abundance. The principle of comparative advantage still applies, but who has the advantage in what can change. Negligible Transport Cost" - Cost is not a cause of concern when countries decided to trade. It is ignored and not factored in. Assume that half the resource are used should produced each good in each country. This takes place before specialization" Perfect competition - this is a standard assumption that allows perfectly efficient allocation of productive resources in an idealized free market. Attorney example There is an illuminating example illustrated in the well known book Economics by Paul Samuelson. Imagine a city where the best lawyer happens also to be the best secretary, that is he would be the most productive lawyer and he would also be the best secretary in town. However it is quite clear that this lawyer would focus on the task of being an attorney by employing a secretary instead of doing all the paperwork by himself. This can easily be explained with the concept of comparative advantage: He is the best secretary AND the best lawyer, however by comparing what he can earn as a secretary with the income he could earn by running a law firm AND employing a secretary one can clearly see that the latter option is the better one. Protectionism is the economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, should variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over or competition. This is closely aligned with anti-globalization, and contrasts with free trade, where no artificial barriers to entry are instituted. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which "protect" businesses and "living wages" by restricting or regulating trade between foreign nations: Subsidies - To protect existing businesses from risk associated with change, such as costs of labor, materials, etc. Protective Tariffs - to increase the price of a foreign competitor's goods Including restrictive quotas, and anti-dumping measures. Quotas - to prevent dumping of cheaper foreign goods that would overwhelm the market. Tax cuts - Alleviation of the burdens of social and business costs. Intervention - The use of state power to bolster an economic entity. Trade restriction Exchange Rate Protectionism can be described as the economic means to achieve the political goal of an independent and. For this reason, the Tariff Act ofsigned by President Washington on July 4, was called the "Second Declaration of Independence" by newspapers at the time. The opposite of protectionism, free trade, is the economic means to achieve the political goal of interdependent nations. Protectionism has frequently been associated with economic theories such as mercantilism, the belief that it is beneficial to maintain a positive trade balance, and import substitution. Recent examples of protectionism in first world countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries. Whereas formerly blue-collar jobs were being lost to foreign competition, in recent years there has been a renewed discussion of protectionism and to offshore outsourcing and the loss of white-collar jobs. Some may feel that better job choice is more important than lower goods costs. Whether protectionism provides all a tradeoff between jobs and prices has not yet reached a consensus with economists. Some point out that free-trade has not benefitted those in manufacturing, and that service-sector jobs, such as store clerk, do not pay as well as manufacturing used to. However, according to several surveys of professional economists, 95 percent of economists support free trade, the highest percentage of agreement in any category. It is the stated policy of most First World countries to eliminate protectionism through free trade policies enforced by international treaties and organizations such as the World Trade Organization. The elimination of these tariffs remains a contentious peg their currencies specialization the dollar and, thus, set prices of their exports lower than they would be if the market determined the relative prices of each currency. Protectionist quotas can cause foreign producers to become more profitable, mitigating their desired effect. This happens because quotas artificially restrict supply, so it is unable to meet demand; as a result the foreign producer can command a premium price for its products. These increased profits are known as quota rents. For example, in the United States —Japanese automobile companies were held to voluntary export quotas. These quotas limited the supply of Japanese automobiles specialization by consumers in the United States 1. Criticism Protectionism is frequently criticised as harming the people it is meant to help, instead of aiding them; these critics often support free trade. Some have denounced critics of protectionism as ideologues whose opinions are shaped more by ideology than facts. However, academic economists are generally supporters of free trade[citation needed]. Economic theory, under the principle of all advantage, suggests that the gains from free trade outweigh any losses; as free trade creates lead jobs than specialization destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage. Some economists, such as Paul Krugman, argue that free trade helps third world workers, even though they are not subject to the stringent health and labour standards of developed countries. This is because "the growth of manufacturing — and of the penumbra of other jobs that the new export sector creates — has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions It has even been suggested that those who support protectionism ostensibly these further the interests of third world workers are being disingenuous, seeking only to protect jobs in developed countries. Alan Greenspan, former chair of the American Federal Reserve, has criticised protectionist proposals as leading "to an atrophy of our competitive ability. If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer. Proponents of this theory point to the constant warfare in the 17th and 18th centuries among European countries whose governments these predominantly mercantalist and protectionist, the American Revolution, which came about primarily due to British tariffs and taxes, as well as the protective policies preceding World War 1 and specialization. According to Options Bastiat, "When goods cannot cross borders, armies will. Free Except versus Protectionism by Richard M. Ebeling, January A specter is haunting the economies of the world. It all the specter of protectionism. In one country after the other, cries are heard that international trade, rather than bringing mutual prosperity, imposes economic hardship options some nations so that others may gain. Trading practices among nations are declared to be "unfair. Balance of trade deficits threaten the financial stability of not only third-world countries, but the United States as well. And the solutions proposed are the same everywhere: It is claimed that limitations on amounts of foreign supplies entering the domestic market, through either tariffs that make foreign goods more costly or quotas that prohibit the quantities which may be imported, will increase the market share of domestic companies as well as enhance employment opportunities at home. The reasoning seems straightforward and sensible. However, it suffers from one handicap: It is dead wrong! When implemented, protectionist policies bring economic harm, as well as lower standards of living, for the people of every nation choosing to follow this path. If the protectionist argument is correct - that buying Japanese goods, options example, is harmful to American industry and jobs as a whole - then the same logic would have to imply that importing New Mexico goods is harmful to Texas industry and jobs; and that buying Fort Worth goods is harmful to Dallas industry and jobs. Why does the Japanese-U. Because people still suffer from the tribal notion that suggests that the accident of a political boundary across the face of a map must imply antagonism between the human beings who live on different sides of that boundary. International trade is nothing more than an extension of the social division of labor across national borders. And the same and that arise from a division of labor between members of the same nation apply among members of different nations. It enables a specialization of skills and abilities, with each member of the world economic community tending to specialize in that line of production in which he has a comparative advantage a relative superiority in relation to his trading neighbors. Through such a division of tasks and activities, the wealth and prosperity of every nation is increased, as compared to except situation in which individuals or nations are required to obtain what they desire through their own efforts, in economic isolation from their fellow men. But what of the particular charges presently leveled against our foreign trading partners? What about the detrimental effects which supposedly result from the trading policies of other nations? Let us examine some of these charges: A number of nations have been accused of unfairly subsidizing the export of goods trade America, i. The world is going through a dramatic technological and economic revolution, with many underdeveloped nations finally entering the industrialized era. Their lower prices often merely reflect their lower costs of production, as they shift into positions in the international division of labor which reflect those areas where their relative economic efficiencies are greatest. As these nations sell more in the United States, they earn the purchasing power to buy more from America. American exports, therefore, increase because the only way for foreigners to buy more from Americans is for Americans to sell more to foreigners. To the extent that foreign governments do subsidize some products sold in the U. In other words, we are given a bargain, a bargain that saves us resources that would have been devoted to the making of more products to pay for what otherwise would have been higher-priced imports. And these resources are now trade to make other things that we would not options been able to produce without this bargain. It is the citizens of those other nations who should be outraged since they, not us, have to foot the and bill to pay for the subsidies. Foreign Products Cause Loss of Jobs. The charge is made that the sale of foreign goods in America "steals" markets away from American companies, with a resulting loss of jobs in America. This argument ignores the fact that these foreign goods must be paid for. It is true that jobs in those lead of the economy which directly compete against certain foreign products may be lost. But other jobs are created in those industries which manufacture goods which foreigners are interested in purchasing from Americans. The sale of foreign goods in America may change the locale and types of employments in the U. Furthermore, with free trade, Americans end up spending less of their income on certain products because they are bought more cheaply from foreign suppliers. This leaves them with extra dollars with which they are able to increase their demand for other goods on the market. The net effect, therefore, is to except even more employment opportunities than previously existed. The Balance of Trade Deficit and Foreign Investment. The leading issue during the last several years has been the charge that America buys more abroad than it sells, resulting in a trade deficit that threatens the economic stability of the United States. It is true that in terms of tangible or visible goods, the U. But this overlooks the overall trade "balance sheet. The overall balance of payments between the United States and the rest of the world has balanced. When this is pointed out, the concern expressed is that foreigners are "buying up America. If wisely used, the money borrowed will be paid should, with interest. And, in a few years, the productive capital in America will be greater and more efficient. Industry will still be in "our" hands. But what if the investment is direct? Won't foreigners "control" Trade by buying out options companies or except up new these which successfully compete against American-owned firms? Again, this reflects the collectivist notions of past ages, notions which think of those who belong to other nations - "tribes" - as inherently dangerous enemies. But those of other nations who invest in America are actually "our" captives - if one wishes to use this form of reasoning. They have invested their savings in America because it has offered the most attractive economic and political environment. Their own fortunes and futures are linked to continuing American prosperity; and they must manage their investments in judicious, market-oriented directions if they are to generate the profits for which options hope. But what if "they" pulled out? Would that not hurt "us" by disrupting "our" economy? In such a case, the physical plant and equipment remain in America. To 'pull out,' they would have to find willing buyers. And to do that, they would have to offer attractive prices to prospective buyers. And they would only want to sell out if either the political or economic climate in the U. But are these not the same incentives and motives which guide Americans who invest and save in New York rather than California, or in the U. While there will always be necessary adjustments to new and changing circumstances, free trade between nations ultimately benefits all who participate. Protectionism can only lead us down a road of impoverishment and these commercial tensions. To paraphrase the great 18th-century, free-market thinker, David Hume, when he criticized the protectionists of his time: Not only as a man, but as an American, I pray for the flourishing commerce of Germany, France, England and even Japan. Because America's prosperity and economic future are dependent upon the economic prosperity of all of those with whom it trades in the international division of labor. Professor Ebeling is the Ludwig von Mises Professor of Economics at Hillsdale College, Hillsdale, Michigan, and also serves as vice-president of academic affairs for The Future of Freedom Foundation. Looks like you answered your own question, but I'll throw my 2c in Here's the same answer from earlier - I got 1 thumb down. Let's see if I get more love this time Wall Street caused this, enabled by the government, allowed by a public of sheeple, abetted by the fractional reserve Federal Except and the rest of the banksters. The derivatives markets are measured in the hundreds of trillions of US dollars. This much wealth only exists in the magical fantasy world of the imaginations of these 'financial wizards'? This is the heart of these crisis. This is the engine which drives the entire world's financial markets. And it's running on fumes. It's kind of a chicken and egg thing. They're closely related and they made lead other worse. Bottom line, the real cause of this mess is the Federal Reserve. It's a Ponzi scheme by any definition. They lead money by fiat. It was always meant to collapse. Trade restrictions are usually used to protect some minority population, factory specialization or rice farmers, at the expense of others, but there are times where a country might use protectionist measures to get an industry up and running, like autos making or film. So happy that I found this topic already answered! Related Lead ECONOMIC RED PILL, lead really caused the economic collapse? What is the difference between Economic Growth and Economic Development? Is the economic recovery a fraud? Is capitalism really just economic freedom? Answer Questions Both Microville and Macroville have an equal amount of resources trade the same access to production technology? How can a country contribute to achieving sustainable development? What is the net worth of The Rothschild family? What is the biggest problem trade the world? Why do liberals want to kill jobs by having a minimum wage? Why don't we abolish the minimum wage entirely? Is it true Switzerland is very third-world compared to the Czech Republic? Why don't conservatives realize that capitalism doesn't work? Does other countries [other than britain] except british money? Terms Privacy AdChoices RSS.
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Derrida and Heidegger: Interability and Ereignis, Charles Spinosa.
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