Free International Trade Characteristics Essay Sample
International trade according to the World Trade Organization refers to the exchange of goods and services across countries' borders in the international forum. It has had many beneficial effects on countries that engage in international trade with modern transport and industrialization coupled with establishment of multinationals has enhanced globalization of which without these we would have limitations to access and flow of goods and services and hence stagnant economic growth since we cannot refute the fact that international trade has a very significant effect on many countries economic growth in terms of Gross Domestic Product.
It is important to note that international trade mostly with goods and services as compared to factor inputs such as capital and labor. It is assumed that when importing or exporting goods and services the factors of production are embodied in the final good which is reflected in the final price to the importing and exporting country. The primary reasons of international trade refer to the most important objectives that international trade strives to achieve once established. Several theories have been made advanced to explain these objectives. In our discussion. We will look at Ricardo's theory of Comparative Advantage
The theory of Comparative Advantage states that given two or more countries they can benefit from trade if in trade absence they experience different relative production costs for producing the same good. This applies even if one country has absolute advantage in production of both goods it can still benefit from trade even though they have different relative efficiencies. The Ricardian model countries specialize in producing what they produce best. It also takes into consideration technology differences between countries. There are assumptions that are made in this model
1) The firms are price takers and not price setters and therefore assumes perfect market competition
2) Perfectly Labor mobility within the local economy but not internationally.
3) Limited labor supply within the economy
4) Marginal labor productivity is constant.i.e.returns to scale do not change
5) The only primary input to production is labour.i.e. The final product's price reflects the amount of labor that has been input to come up with the final product
An employee can in one country produce and trousers and socks at 22 per hour while another in the other country can produce 3 pairs trousers and 6 pairs of socks in one hour. Trade enables both countries to gain due to internal economic trade-offs between trousers and pairs of socks. The lesser efficient country has a comparative advantage in trousers thus finds it easier to produce trousers and exchange with the more efficient country in production of socks. In case of autarky i.e. national sufficiency within the economy of a country with no trade interaction with foreign countries, it would cost 3 pairs of trousers for 1 pair of socks while if we engage in trade, the cost per pair of socks can reduced to one pair of trousers and this can be achieved depending on the level of trade that occurs between the two countries to achieve a level of parity between the two countries. The country with a greater efficiency has a comparative advantage due to specialization in pairs of socks thus can gain efficiency by transferring some of the employees from the trouser factory to the socks industry and trading the pairs of socks for the pairs of trousers. These net benefits from trading in both countries would be referred to as the benefits of trade.
There are other reasons for engaging in trade which would include;
1) Disparities in Endowment of Resources
This creates variations in opportunity costs inputs leading to production across countries. It is therefore that countries export products that they can produce cheaply and import products that are difficult to obtain within the country's borders and can be sourced from countries where they have comparative advantage in their production.
2) Economics of Scale.
Refers to the average cost in the long run of production which reduce as the firms expands its production operations thus each country benefits if they specialize and produce more at reduced average costs.