Question

Of the trade theories we discussed in class choose one trade theory that features the role of government and one trade theory that does not. Comparing the two trade theories, outline which theory best represents the advantages and disadvantages of completely free international trade. In your answer justify why you chose this theory.

Answer 1

Trade Theories- With & Without Government
Mercantilism is considered as the oldest version of trade theory existed in the economy. The theory believed that a nation’s power and wealth is determined by the level of increased exports and thus increasing the involvement in the trade. Being gold the medium of transaction, the nation with highest amount of gold could be considered as the wealthiest. Since the government was able to intervene, nations tried to import less so as to maintain the stability for a wealthy nation. This led to export failure for many countries since they lack demand for their exports. Also, colonized countries were much exploited by charging high for their imports and paying very less for their exports.
Comparative advantage theory calls for the kind of trade that a nation could be involved in, with the advantage that they may pose when compared with others. This helps nation to export commodities in which they have less opportunity cost. With no government intervention the theory claims for the best for every nation since the chance of everyone to export become high. Since the comparative advantage is considered, the nations would also be interested in imports of commodities on which they do not pose comparative advantages.
Among the both, Comparative advantage theory represents the best for the advantages and disadvantages for free government intervention. Since, the theory calls for free tariffs, imports will not be discouraged which could help the comparative advantages of every nations, which is an important advantage to be considered. The disadvantage is the inability of nations to find the best commodity in which they may have comparative advantage. If the market fails to find one, it’s the government only can help to provide by intervening in the market and decisions.