Most macroeconomic theorists and policy makers in Developed Countries rapidly embraced the new wisdom, in the belief that by following this scheme, their countries would achieve or regain the high rates of growth of the past. Each strategy has been subject of an extensive theoretical survey and that the literature examining the relationship between trade and growth has increased substantially in the last decade with the drive provided by the endogenous growth theory. However, it is not the intention of the present study top participates in or Contributes to the discussion concerning the advantages and disadvantages of both economic strategies, which recently gained a new impetus Frankel and Romer (1999).accelerate economic growth. Most, international trade and development theories depicts a positive relationship between trade and economic growth, right from classical comparative advantage model of David Ricardo, the neoclassical model of Heckscher and Ohlin, to the contemporary endogenous growth models. Although the various models assume that different factors cause the trade, but the end result depicts improvement in the output and
Mercantilism was a system that encouraged Americans to trade among themselves instead of with outside powers by not taxing American Merchants and instead taxing merchants to import. Mercantilism aided in the development of America because America’s new economy and markets were sheltered from massive and foreign companies allowing a massive rate of growth for America's economy. The process of taxing foreign companies is known as protectionism which is directly involved with mercantilism and the strong belief in profitable trading that America possessed at the time. All three of these factors allowed America to grow at an extremely unprecedented rate in religion, politics, and
The model assumes that exogenous economic growth is continuous over time. In other words, the capital stock of the country accumulates over time as the population continues to save. This is because labor input also increases correspondingly with the technological progress. As the government and the population’s income increases as a result of their increased output resulting from increased use of technology, their savings also increases as they set a faction of the income for savings. That is, the gross domestic product increases as a result of an increase in per capita income as the country experiences a technological progress which increases its productive efficiency.
Mercantilism is the concept that to be successful, a government should be "designed to secure an accumulation of bullion, a favorable balance of trade" (Meriam Webster). England and Spain, used the concept of Mercantilism to gain wealth and power from their newly developed colonies in North America. Spain had a plan to go to the colonies and extract gold and silver from the land. England however, had a plan to go to the colonies, settle on the land, and accumulate items that could be traded to other countries in exchange for money. Spain sailed over the Atlantic Ocean in the late 1500's to settle in North America.
Comparative advantage is the theory that free trade between two or more countries will increase consumption and is of mutual benefit to both countries. Each country should export a good for which it has a comparative advantage over and export surplus production in exchange for goods produced in another country which has a comparative advantage for the good. This is under the assumption that there is differences in labour productivity in both countries. According to Comparative advantage even a country with a comparative disadvantage will gain from specialising in most efficient goods. According to Adam Smith (1776) Wealth of Nations, absolute advantage is the ability of a country to produce more than other countries but with less resources.
Mercantilists believed money was equal to power, and that wealth was strongly correlated to political or state power. But over all, their entire goal was to advance the country’s interest through regulation. They defined wealth through the country’s supply of precious metals (e.g. gold and silver). All goods needed to be produced in the country itself to be able to decrease imports and increase exports, so that there would be a surplus on the balance of trade.
The theory was first introduced by David Ricardo in 19th century stating that international trade should be based on the differences in the relative opportunity costs of production. So instead of comparing monetary costs of production, countries must compare their relative opportunity costs of a production- what they give up to produce one type of goods. In a simple comparative advantage model, 2-good 2-country situation, if country A must give up 3 wines to produce 1 cloth and country B must give up 2 wines to produce 1 cloth, country B has a lower opportunity cost of producing cloth. Hence a country should produce and export goods that they have in abundance and cost at a relatively lower opportunity cost than other countries. The implementation of comparative advantage in free trade thus allows countries to specialize their production which results in higher quality of goods and efficiency of resource allocation.
The two theories come with the notion of advantageous trade. In his book, ‘The Wealth of Nations’, Adam Smith, described the theory of Absolute Advantage in the following way; “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. " (Book IV, Section ii, 12). Smith tried to explained that if country A can produce good X at cheaper price than country B and country B can produce good Y at a cheaper price than country A, thus both country A should trade its relative cheap product (good X) for country B relative cheap product (good Y). As a result both country will benefit from a cheaper
There by a country would be able to maximize its production (GNP) and its consumption or One big question that smith failed to answer was what if a country does not have absolute advantage? What would be the structure of the trade? David Ricardo addressed the answer for this question through comparative advantage (Ibid). He pointed out that countries should specialize in production where their greatest comparative advantage. Economic welfare (Salvatore,
The trouble is that in traditional theory comparative advantages depend on the fact that countries face different costs for producing goods. Therefore, if prices do not reflect correctly these costs, the market mechanism is bound to produce distortionary