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ec_midterm.docxECS 440: International Trade Theory 3
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ECS 440: International Trade Policy
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1. Global Economic Development
In the prehistoric ancient time, trade existed in its most basic for. For example, one would exchange any good that is in his or her possession for another desired good. The trade grew and involved communities thus gaining the name barter trade. Afterwards, a system of legally accepted tender came to be so as to regulate the trade. The legal tender was the acceptable current and each society or kingdom had its own. Upon the advent of globalization, there grew a necessity to harmonize the legal tender from kingdom to kingdom or nation to nation to facilitate the global trade thus development of a system of foreign exchange.
Trade was vital for the entre economic development throughout man’s history. It is through trade that people could create wealth. People then were taxed and the existing governments built infrastructure to enable trade to go on in a more efficient way. The income raised from trade helps to raise the gross domestic profit of a country thus elevating the standards of living with in the country. Growth and development of the economy also benefitted from trade in that a better standard and base for trade developed from the legal tender. Currently the global economy intertwines intricately as most countries depend on goods from other countries to enable them carry on. An effect in the economy of one country is effective throughout the world, as is the case with the most recent recession. The global economy is now a very intricate maze of trading policies and agreements between countries. The development of the economy is down to the development and efficiency of global trade networks.
2. Ricardian Model of International Trade
Ricardian model of international trade is an attempt to explain the dynamics of international trade according to the comparative advantage indexes between two or more countries. Comparative advantage refers to the ability of a country to produce a certain product at a lower marginal cost as compared to another country. The comparative advantage is due to technological differences between the two countries thus giving one country more production efficiency as compared to the other countries.
The Ricardian model has a set of assumptions governing its application. The first assumption is that the two countries engage in trade, produce two goods, the only factor of production is labor, there exists perfect equilibrium and competition in the market, and the labor and goods produced are homogenous across the nations but productivity varies across the national boundaries. The main reason for the comparative advantage according to this theory is that technological indifferences result in the varying efficiencies of the concerned nations. Absence of technological differences would result in a zero comparative advantage since all countries would have the same efficiency.
Free trade refers to a situation whereby countries do not have any restrictions on imports and exports between or amongst them. In the Ricardian Model, countries would benefit from free trade primarily in terms of increasing efficiency through the sharing of technology and elimination of the comparative advantage while at the same time increasing the size of the target market. There are a number of indicators that can apply as measurements for the gains. For example, increased efficiency, increased wages and salaries, and increased profit margins (Atkeson & Burstein, 2007).
3. Heckscher-Ohlin Model of Trade
The Heckscher-Ohlin model is an improvement of the Ricardian model. It employs the use of mathematical equilibrium models to determine and predict the commerce and production patterns based on the endowments of a region or country in its production line. In nonprofessional terms, countries tend to export the products that it produces using its own abundant factors while import the products that consume its scarcest resources. The endowments refer to the factors of production land, labor, and capital. The abundance of these factors tend to give a country comparative advantage over the other competing countries
The assumptions of the Heckscher-Ohlin model are almost similar to the assumptions of the Ricardian model. The first assumption is that both the trading countries have similar technology for production. This is evident if the productivity per capita is similar in both countries. The other assumption is that the output of production exhibits a constant return to scale. The third assumption is that the technology employed by the countries to produce two different commodities is different. The theory also depends on the factor immobility between the two countries. This means that factors of production cannot move from one country to another. In addition, the pricing of the commodities has to be similar in the countries and the countries have perfect internal competition.
In this model, the pattern of trade is due to the comparative advantage a country has in comparison to its competitors. The country with abundant endowment export to the country with less endowment. Wage and profit margin equalizes according to the general equilibrium formula. The condition that could falsify this is majorly due to an inaccurate account of income to capital of production ratio (Cuyvers, Embrechts & Rayp, 2002).
5. Protectionism
Protectionism is the economic policy designed to create or promote fair competition between imports and domestic products. This can be through a variety of ways such as introduction of trade tariffs, import quotas, and export subsidies. There are a number of reasons that warrant protectionism in a country. Protectionism inhibits free trade, which goes to make goods have a higher price due to the import tariffs. This curtails on the amount of import goods thus reducing the availability of the commodity within the country making its price to increase.
On the other hand, protectionism shields domestic commodity from the external competition posed by the imported commodities. This is important as it helps to keep the domestic companies afloat ensuring job security for its citizens. It is important for a country to have a low unemployment index as it helps in keeping insecurity in check.
The other benefit of protectionism is that it helps in terms of export subsidies. The export subsidies enable the realization of a larger profit margin for the domestic firms. A larger profit margin for domestic firms translates to increase in salaries and wages for its citizens thus enabling them to improve their living standards. Also, a higher foreign exchange due to increased exports gives the government more money for developmental projects.
Protectionism also instigates industrialization with in a country as the firms get investment subsidies. This helps to reduce the unemployment level within a country and also indirectly improves infrastructure and technology level within the country. All these are crucial to the overall development of the country.
Analyzing the arguments, it is clear that protectionism has its benefits as well as its drawback. It hinders global free trade which is quite beneficial to all people associated but would have devastating effect on other firms that cannot compete with multinational organizations. Therefor it is quite clear that the arguments supporting protectionism are valid (Baldwin & Evenett, 2009).
Reference
Atkeson, A., & Burstein, A. (2007). Pricing-to-market in a Ricardian Model of International Trade (No. w12861). National Bureau of Economic Research.
Baldwin, R., & Evenett, S. (2009). The collapse of global trade, murky protectionism and the crisis: Recommendations for the G20. CEPR.
Cuyvers, L., Embrechts, R., & Rayp, G. (2002). Internationale economie. Garant.
Dicken, P. (2003). Global shift: Reshaping the global economic map in the 21st century. Sage.
