(David Ricardo, Theory of Free International Trade). The neoclassical economists believed that in a competitive market, prices would direct consumers and cause the most efficient allocation of resources, which will maximize society’s income. This believe had developed the pure theory of trade and this also present Adam Smith’s theory in the invisible hand of the market and competition. Also, it shows the benefits of laissez-faire policy in relation to international exchange. The neoclassical economists strongly agree that the comparative advantage theory by David Ricardo is much more relevant to international trade then the absolute advantage by Adam Smiths.
According to these economists trade is not a zero-sum game because both sides can benefited when they engaged in international trade. Mercantilism failed to understand the benefit of international trade as well as absolute and comparative advantages of the nations. Then the Adam Smith, David Hume and David Ricardo were bring their thoughts against mercantilism. Adam Smith’s “The Wealth of Nations” in 1776 which is
4. The Ordinal Approach in Utility Theory Ordinal utility is a view of utility measurement based on the presumption that the satisfaction of wants and needs is not a quantifiable characteristic of human activity and that preferences are subjective. Preferences among goods can be ranked (first, second, third, etc.) but not measured according to a scale. In this regard, consumers need only specify whether one good is more or less preferred than another.
According to this economic system, it is required that the amount of exports should be more than the amount of imports so governments took the precaution for maximizing exports and minimizing imports. In fact, Helpman (2002) argued that in mercantilist period, when countries traded with each other, this trade would be profitable only if the country had current account surplus which means the value of export was greater than the value of import. This situation also represented the favorable balance of trade in form of having resources and precious materials. In these period, International trade was accepted as zero-sum game which means that while one country gains, this gain is loss of other country at the same time. As a result of the understanding that having precious materials brings national welfare, mercantilist tended to create a national economy which was oriented toward exporting industrial goods as a final goods and importing precious materials and raw materials as resources.
Economic interdependence enhances the chances for international peace throughout international trade and it reduces the possibility of conflict. Democracy and economic interdependence, both reduce the likelihood for conflict. Democracy and interdependence are both practices that promote international cooperation. In my opinion democracy and interdependence strengthen each other. Democracy is associated with lower political instability and higher economic freedom.
The traditional view of cost behavior has been that the costs are either fixed or variable with respect to changes in volume. This view holds that changes in costs are driven solely by the magnitude of change in the cost driver. The direction of change in the cost driver has no role to play with this model. Several studies (notably, Callen, 1991, Callen, et al., 1998, Noreen and Sorderstrom, 1994, 1997) have been discussed regarding the limitations of models of cost behavior that are based on the assumption of a linear cost structure. Cooper and Kaplan (1998) asserted that cost stickiness occurs when managers direct a supply of contract costs that is not cost-effective.
It remains a major influence on much international trade policy and is therefore important in understanding the modern global economy. The principle of comparative advantage states that a country should specialize in producing and exporting those products in which has a comparative, or relative cost, advantage compared with other countries and should import those goods in which it has a comparative disadvantage. Out of such specialization, it is argued, will accrue greater benefit for
So, a more competitive economy is the one that is expected to grow more rapidly over the way to long term. The two dissimilar concepts of productive efficiency are: relative efficiency in manufacturing exportable goods and absolute point of production costs related to other countries. Relative efficiency doesn’t show competitiveness as a whole of different countries rather it clarify the paths of Global specialization in production whereas absolute production costs defined how successful countries are in global marketplace for individual goods [Irfan ul Haque
The globalization of markets is approaching. The multinational organizations and the global corporation are different. The multinational organizations usually function in different countries and produce or offer their products and services by aligning them with the typical need of that nation which in turn involves comparatively high price. While the global corporation normally functions with decisive perception at low costs by assuming that the entire globe is an undivided entity, it trades the same products and provides same services to all countries irrespective of their need. Business globalization drivers like potential market, cost, and different industry circumstances are decided externally.
“Globalisation is the cluster of technological, economic, and political innovations that have drastically reduced the barriers to economic, political, and cultural exchange” (Drezner: 53). It involves intensified flows of commodities, capital, information and people which enable cross-border integration of activities (B&A: 1). Economic globalization is characterized by the rapid expansion of international trade, integration of financial markets, multinationalization of production, foreign direct investment and capital market flows (B&A: 4) (Garrett: 790). It is perceived by economists to reduce international arbitrage costs (S&U: 301). Global economic integration (GEI) is a phenomenon which has emerged from economic globalisation, and is defined by capital market openness (Mosley 2000).