This document discusses different trade theories and their underlying concepts and arguments. It covers interventionist theories like mercantilism which emphasize encouraging exports and discouraging imports to accumulate wealth. It also discusses free trade theories proposed by Adam Smith and David Ricardo, including the concepts of absolute advantage based on natural advantages and acquired expertise, and comparative advantage based on differences in production efficiency between countries. Theories are evaluated based on their assumptions and implications for specialization and countries benefiting from one another through trade.

1. Understanding trade theories
Dr Efrider Maramwidze2014

2.  Understanding the concepts underpinning international trading
 define
 What is its importance
 Advantages?
By use of trade theories (assumptions)
For example: Adam Smith
By understanding trade theories, we can provide answers to the
arguments
 Why, how, who, what, when and where do we trade??
Overview

3. 1. Interventionist
 Ancient and very Traditional trade theory (1600 – 1700)
centuries
 Emphasises that countries should simultaneously encourage
exports and discourage imports
 Surplus rather than deficit
 The concept underpinning mercantilism is accumulation of
wealth (never mind human development, standards of living
or international relations
 Restrictive is beneficial to the country
Branches of trade theories

4. 1. mercantilism
Capital accumulation (gold, livestock, valuables)
Wealth is power and wealth is measured by its holding of
treasure (gold)
 Countries should export more than import.
 Restrict imports and subsidies for certain goods
and services.
 The rise of colonialism
Restrict mobility of factors of production
What is the argument against mercantilism??
Examples of interventionist theories

5. 2. Neo-mercantilism
 Imports restricted/discouraged by tariffs and taxes
 Export encouraged by offering subsidies
and free trade zones
Aims for effective monetary and fiscal policies for home
nation (Positive B.O.P)
Establishment of colonies and foreign assets.
Research and discuss the concepts around mercantilism
Examples of interventionist theories

6. Free Trade Theories
 Otherwise known as the Laissez-faire
 Opposing intervention of the government
 Let the market forces determine trade relations
 Very new very contemporary trade concepts
 Adam Smith pushed for free trade
 Argued that it is beneficial for the country
 High global output
The other branch of Trade Theories

7. 1. Absolute advantage
2. Comparative advantage
 Both theories advocate for free trade
 No restriction to imports or exports
 Companies or countries should produce whatever
they can and sell
 Both implies specialisation
Ideologies of free trade theories

8.  Adam Smith developed this theory to challenge mercantilists
 He argued that country can benefit from each other
 Different countries have different absolute advantage
 Meaning, country A can produce goods/services more
efficiently than the other
 So let that be to benefit the citizens/country
 Let companies/consumers/country buy cheaply from
countries that have the absolute advantage
 Therefore specialisation is the way to go
1. Absolute advantage

9. 1. Natural advantage
 Climate
 Geographical location
Discuss these in twos
Give examples of a country’s natural advantages
2. Acquired Advantage
- Developed technological expertise
- Enables it to produce unique products rather than natural
resource/agriculture/forestry/fishery etc
Discuss and name countries with unique product expertise. EG
Technological knowhow
Sources of Absolute Advantage

10.  David Ricardo had issues with absolute advantage?
 What is self sufficient of absolute advantage
 He proposed that, even in the presence of absolute
advantage, a country should produce those it does more
efficiently
 Suggesting that countries benefit from each other
Discuss your understanding of comparative advantage
Well equipped (machinery) country vs under equipped
(machinery country) but both have absolute advantages
2. Comparative advantage

11.  When a country has a comparative margin of
superiority in the production of a good/service it
could be because of
 Factor endowment (factors of production)
 Land
 Labour
 Capital
 Entrepreneurship
Sources of comparative advantage

12. Connecting the political and economic systems
Political and economic policy ideologies
Either interventionist or free trade
All based on various assumptions and underpinnings
Interventionist assumptions
 Mercantilism
 Neo mercantilism
Free trade
 Comparative advantage
 Absolute advatage
Summary

13. GROUP ASSIGNMENT REMINDER!!!
Any QUESTIONS???