Question

1. a) Compare and contrast the GATT and WTO.

b) Explain the rationale for trade in your own words.

c). List the theories of international trade. (1 mark)

d) In your words, carefully distinguish among, three (3) of the theories of international trade: absolute advantage, (ii) comparative advantage, (iii) competitive advantage.

Answer 1

a)Gatt(General Agreement on Tariffs and Trade) is international multilateral treaty which was signed by 23 countries to promote international trade and aimed at removing trade barriers between countries .WTO(World Trade Organization) is a world organization which superseded GATT. and aims at dealing with rules of international trade between member countries.While GATT is an agreement, WTO is a permanent organization .In GATT,participating nations are known as contracting parties while in WTO participating countries are called member nations.WTO has awider scope than GATT as the rules of GATT are applicable only when trade is done on goods but WTO deals with rules on goods, services,and intellectual property.

b) The countries can expand their markets for goods and services across borders ie beyond domestic market , when international trade is carried out. The market becomes more competitive and there is competitive pricing which brings cheaper products home to the consumers .Without trade each country would produce goods domestically according to their needs and would be deprived of the benefits of trade as cheaper prices, variety of products etc.

c)International trade is exchanging goods and services across international borders, and the different theories are- Mercantilist theory,Absolute advantage theory, Comparative advantage theory, Heckscher Ohlin theory,Product life cycle theory, Competitive advantage theory etc.

d)Absolute advantage is the ability to produce goods with lesser resources than another producer and at a leser time.Eg if France can produce 14 airplanes in a month and US can produce 45 airplanes in a month , US has an absolute advantage in producing planes.Comparative davantage is the defined as producing a good at a lower opportunity cost than another producer .Opportunity cost is the value of the next best alternative foregone when a decision is made.Eg oil producing countries has a comparative advantage in chemicals .Competitive advantage is an advantage over the competitors of the product by certain means like lowering the price of the product,offering greater value for the product or by giving more benefits and services for higher prices that is charged for the product.Eg if a company advertises for a product with lower prices than the competitors ,than that company has a competitive advantage over the other country.