Economics Assignment (Solved)

Added on - 21 Apr 2020

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Running head: ECONOMICS ASSIGNMENTEconomics AssignmentName of the StudentName of the UniversityAuthor Note
1ECONOMICS ASSIGNMENTIntroductionTrade, by the economic definition of the term itself, refers to the exchange of goods andservices, for monetary or non-monetary substances among two or more agents. In this context,the phenomenon of international trade can be referred to the exchange of the goods and services,which are produced in difference countries, across the domestic boundaries (Feenstra 2015). Insimpler words, the term international trade refers to the transaction of goods and services amongdifferent countries in the world and this comprises of a significant share of the overall economicactivities of most of the countries in the world. The phenomenon of trade has been existing in theinternational commercial scenario for centuries, however, with time and changes in the dynamicsof the global economy, the international trade practices have also seen sufficient dynamics andmodifications in an overall framework (Marshall 2015).International trade has been one of the primary contributing factor in the economicdevelopment of the nations and there has been extensive theoretical works in this aspect. Therehas been existence of different trade theories in the economic scenario of the world and with timeand changes in the international situations, these theories have also evolved in order to adapt tothe existing situations. In other words, the evolution of the trade theories in the internationalscenario reflects the mechanism in which the nations over the world have been commerciallydealing with one another over time, which also reflects on their production behavior over time(Gopinath, Helpman and Rogoff 2014).In the essay, I will try to evaluate the abilities of the traditionally existing trade theoriesin explaining the patterns, which exist in the contemporary trade scenario in the internationalframework. With reference to the Leontief Paradox, which shows one of the most striking
2ECONOMICS ASSIGNMENTapparent anomalies in the trade scenario, I will also analyze the efficiency of the New TradeTheories in explaining the anomalies and issues, which the Leontief Paradox pointed out(Johnson, 2013).Evolution of trade theories: Effectiveness in contemporary scenarioMercantilismOne of the very first trade theories is known as the “mercantilism”, which proposed that anation develops faster by exporting more than what it imports. This concept developed in thesixteenth century and remained in existence until the middle eighteenth century, when monetaryexchanges were done in terms of gold. However, this theory was very broad and vague and wasvalid for a limited countries as the price of gold remaining fixed in the short run, the advantagesof trade were only accrued to some countries in the expense of others. This theory lost itssignificance with time as other more inclusive and practical theories started coming intoexistence (Heckscher 2013).Absolute Advantage TheoryThe theory of Mercantilism was first opposed by the theory of Absolute Advantageproposed by Adam Smith, which highlights the implications of division of labor andspecialization in the international economic scenario. According to this theory, a country shouldproduce those products in which they enjoy absolute advantage and then trade these commoditiesfor those in which the country do not have absolute advantage. One of the primary contributionof the absolute advantage theory, apart from the aspect of specialization and efficient utilizationof abundant resources is that the theory nullifies the need for the presence of government
3ECONOMICS ASSIGNMENTintervention in the domain of trade. This is because according to the theory, the presence ofgovernment leads to inefficient resource allocation and lesser gains from trade (Reisman 2014).However, the theory, as proposed by Adam Smith, fails to take into account the cases inwhich one of the two trading nations enjoy absolute advantages in the production of all the goodsthat are traded among the nations. Given this scenario, as par the absolute advantage theory, thenation having absolute advantages in the production of all the goods should produce all of them.However, this completely rules out the chances of trade between the two countries, therebyshowing contradictions among the two conflicting propositions (Schumacher 2012).Comparative Advantage TheoryTaking into account the limitations of the absolute advantage theory, the theory ofcomparative advantage in international trade, was developed by David Ricardo. This showed theway in which two countries can trade between each other even in the scenarios where one amongthese two enjoys absolute advantages in production of all the goods and the other country doesnot have absolute advantage in any of them (Laursen 2015). According to the ComparativeAdvantage Theory, the nations in general try to specialize in those industries and export thosegoods and services, where they have comparatively lower opportunity costs than the otherindustries where their opportunity cost of production is comparatively higher. This can be shownwith the help of the following example:
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