5. Explain why economists believe that liberalizing trade is inherently benefici
ID: 1135916 • Letter: 5
Question
5. Explain why economists believe that liberalizing trade is inherently beneficial to all trading partners. Provide relevant examples to illustrate your answer
6. What were the Mercantilists’ views on trade?
How were their views different from those of Adam Smith and David Ricardo?
What is the relevance of this debate to today’s debate about the global trading system?
7. In what way was Ricardo’s law of comparative advantage superior to Smith’s theory of absolute advantage?
How do gains from trade arise with comparative advantage?
How can a nation that is less efficient than another nation in the production of all commodities export anything to the second nation?
Explanation / Answer
5.)
Free trade facilitates the flow of goods and services across the countries. Market size gets expanded. Increase in demand for export and import further expand market.
First and foremost advantage is that it leads to fall in cost and goods and services are available at cheaper rate. Welfare of public gets increased. Few peoples may lose their jobs but competition ensures that efficiency is maintained in economy. High efficiency produces higher growth rate.
Thus, trade proves beneficial to all.
6)
Mercantilist does not believe in free trade. They recommend state intervention in economic activities. According to them, trade can not be positive sum game, in other words, trade is zero sum game where one country can gain at the expanse of another country.
Balance of trade must be positive.
Adam Smith and Ricardo do not believe that trade is zero sum game, instead they have called for free trade where all participating countries would be benefitted.
Today in world, now major economies are retreating from globalization and tariffs and non-tariffs barriers to gain from international trade. Most of countries are moving towards the belief that trade is zero sum game.
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