Topic: Advantage and Disadvantage of free trade and theory of international trade law

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International Trade

The process of buying goods and services from

the rest of the world (importing) and that of

selling goods and services to the rest of the world

(exporting) is referred to as international trade

International trade is the exchange of capital, goods, and services across international borders or territories.

What is Free Trade? Occurs when there are no artificial barriers

put in place by governments to restrict the flow of goods and services between trading nations.

Reasons for Trade

Differences in Factor endowmentsVariety and quality of goodsGains from specializationPolitical reasons

Advantage of free Trade

1.Increasing competition 2.Variety of products 3.Creating employment 4.Developing international relationship 5.Promoting democracy 6.Promoting rule of law 7.Promoting free flow of trade8.Benefit of consumer

Disadvantage of free trade1.effecting national economic 2.threat to small trades 3.reducing the demand local product 4.vulnerability in international law.

1. Absolute cost/ advantage theory Adam Smith 2. Comparative advantage theory David Ricardo

Theory's of international trade law

Adam Smith1723-1790Scottish moral

philosopher and economist

“Father of Modern Economics”

Wrote “The Wealth of Nations”

Famous for writing about “The wealth of Nation”.

Absolute cost/ advantage theory

According to Adam smith on his book of “The wealth of Nation” (1776).

He have mention about an absolute advantage as advantages of grater output of goods & services when other nations cannot produce same amount of goods and services while utilizing same amount of resources.

He refer an examples as giving the Absolute advantage of English textile manufacture & the French world wide efficient wine Industry.

Due to the having of favorable climate, good soils, Accumulated expertise the French has the most efficient wine among the world. This indicate that the specialization on nation Advantage is more beneficial in today globalization worlds.

Absolute Advantage theory

Absolute cost advantage theory of international trade to remove drawbacks and to increase trade between to countries.

A country has an absolute advantage in the

production of a good when it can produce more of that good than another country with the same resources.

Assumptions of the theory

Trade is between two countries

Only two commodities are traded

Free trade exists between the countries

They only element of cost of production is

labor.

Smith express an idea that A nation never supposed to produce goods and services which they can find more cheaper and qualitative from other nations.

Therefore, specialization in the production of goods and services which they have an absolute advantages will help two different nation engaging on their trade. So when a country specialize in particular kind of products they don’t supposed to produce all kinds of products which all it consume and utilize all kind of resources as well. According to the absolute advantage theory, international trade is a positive-sum , because there are gains for both countries to an exchange.

 USA has an absolute advantage for producing Wheat.China has an absolute advantage for producing electronic goods.India has an absolute advantage on cheap labor etc..

Example of Absolute

Advantage theory

Country A can produce 1,000 parts per hour with 200 workers.

Country B can produce 2,500 parts per hour with 200 workers.

Country C can produce 10,000 parts per hour with 200 workers.

 _______has the absolute advantage.

Comparative Advantage

David RicardoA famous economist named David Ricardo

(1772-1823) came up with the law of comparative advantage.

According to this law, specialization and free trade benefits all trading partners.Countries should specialize in those goods they

have a comparative advantage in.

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen.

Comparative AdvantageDefinition

Comparative advantage is the basis for all trade between individuals, regions, and nations.

The ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

A person has a comparative advantage if s/he can produce something at a lower cost than others.

This is not the same as being the best at something.

With Comparative Advantage, everyone wins through trade.

Those with absolute advantages can buy goods and services from businesses who produce them at a comparatively lower cost.

Comparative Advantage theory

Example of Comparative Advantage theory

Production Possibilities without Trade

India can produce 4,000 yards of textile per day or 1 ton of chocolate per day.

Nepal can produce 1,000 yards of textile a day or 4 tons of chocolate per day.

Production Possibilities without Trade

India has a comparative advantage in producing textiles.

Nepal has a comparative advantage in chocolate.

Second Example

Assume two countries, UK and IndiaThey both produce textiles and books.Their relative production levels are shown in

the table below.

Output  without trade

Textiles Books

UK 1 4

India 2 3

Total 3 7

For the UK to produce 1 unit of textiles it has an opportunity cost of 4 books.

However for India to produce 1 unit of textiles it has an opportunity cost of 1.5 books

Therefore India has a comparative advantage in producing textiles because it has a lower opportunity cost

The UK has a comparative advantage in producing books. This is because it has a lower opportunity cost of 0.25 (1/4) compared to India’s 0.66 (2/3)

If each country now specializes in one good then assuming constant returns to scale output will double

Textiles Books

UK 0 8

India 4 0

TOTAL 4 8

Therefore total output of both goods has increased illustrating the gains from comparative advantage.

By trading the surplus books and textiles, India and UK can enjoy higher quantities of the goods.

Output after trade

Thank you