Evolution of Trade Theories over the years
Trade among counties is happening for ages. At the very basics, trade is about buying and selling – something human beings have been doing since they started living in societies. However, the same used to happen without any rules and regulations and completely depending on the individual or a group of traders. Over period of time countries have realized the need of cross country trading in a structured manner which can bring benefits to the economy and socio-political development. The countries may have strengths in one area based on their populations, or by strategically placed location or by natural resources it has. The countries need to focus on that what they can do best and import what they can get cheaper compared to production in own country. This new era that is unfolding amidst us is characterized by ideas and innovation. It took thousands of years for human society to progress from an agricultural economy to an industrial economy. Here are the trade theories which discussed on self sufficiency and free trade policies.
Mercantilist policy tries to make a country self sufficient.
According to this theory a country’s wealth is measured by its holdings of treasure, which usually meant its gold. This means a country should export more than imports, if successful, receive gold from countries that run deficits. To export more than they imported, governments imposed restrictions on most imports, and they subsidized production of many products that could otherwise not compete in domestic or export markets. Some countries used their colonial possessions to support this trade objective. The colonies had to export less highly valued raw materials and import more highly valued manufactured products. Mercantilist theory was intended to benefit the colonial powers. The imposition of regulations based on this theory caused much discontent in colonies and was one cause of the American Revolution.
Recently, the term neo-mercantilism has emerged to describe the approach of countries that try to run favorable balances of trade in an attempt to achieve some social or political objective.
For example a country may try to achieve full employment by setting economic policies that encourage its companies to produce in excess of the demand at home and to send the surplus abroad.
Theory of absolute advantage:
Adam Smith said, the real wealth of a country consists of goods and services available to its citizens. Smith developed the theory of absolute advantage, which holds that different countries produce some goods more efficiently than other countries; thus, global efficiency can increase through free trade. A country can use excess specialized production to buy more imports than it could have otherwise produced.
A country may have a natural advantage in producing a product because of climatic conditions, access to certain natural resources, or availability of certain labor forces. For example India’s large pool of young and educated work force can determine to work in areas where knowledge workers are needed or in source the industries like IT, Pharmacy, Financial services.
Countries that produce manufactured goods and services competitively have an acquired advantage, usually in either product or process technology. For example Scandinavian countries which worked over the years in Telephone technology have an acquired knowledge of Telecom domain. This acquired product or process knowledge can be used effectively for other areas of work to get specialization.
In 1817, David Ricardo examined the question, “What happens when one country...