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New Ideas From Dead Economists, Essay Example

Pages: 8

Words: 2064

Essay

To what extent do the classical theories of trade explain modern world trade patterns?

 The classical theories of trade were built upon an understanding of how individuals were able to travel from one place to another, spreading their ideas and influence. World trade became prominent once individual’s had the ability to travel across the sea, and this ability expanded even more significantly with the development of airplanes. The need for trade developed from the need for resources. Since ancient civilizations noted that they did not have access to all of the goods and necessities that individuals living in other areas did, so they set up trade routes. As the want for these goods increased, the complexity and effectiveness of these trade routes increase as well. In the modern era, this is even more the case. Our ability to do trade with others is practically endless due to the availability of enhanced transportation method and the internet. Therefore, the development of classical trade paved the way for modern trade, and the two share many patterns of similarity.

According to our current understanding of history, trade was made possible primarily due to the establishment of human civilizations in the proximity of waterways. From 3000 to 1000 B.C., trade occurred primarily in this manner, between small towns located nearby (Buchholz, 1999). Trade was established as a means for each individual living within these societies to ensure that they will have the basic needs that they require to survive. Therefore, if there was a food shortage in one locality, these individuals would be able to compensate by providing items in exchange for what was needed. In this way, bartering was established as a manner of currency, in which goods could be exchanged for other goods and services. This is the first known incidence of the collaboration between different villages in order to ensure their mutual benefit.

As sailing technology increased, people were able to access lands that were further and further away. This allowed them to come into contact with new people and new products. Trade became more valuable as different civilizations discovered new resources that they would be able to take advantage of in order to make their lives easier. During 1000 B.C., the technology that encouraged trade by land increased as well. Communication between diverse communities led to the establishment of the trade caravan, which allowed trade routes to be established between Asia, the Middle East, and India. This contributed to greater collaboration between diverse societies, which paved the way for introductions to new cultures.

Our early understanding of trade reflects our modern day trade policies because we aim to continue to expand our knowledge and efficacy during this process. Ultimately, different countries benefit when they are able to ensure that their good are imported and exported quickly and efficiently, and that they are of high quality, because this will lead to future business. Ancient cultures were also concerned with these factors, and even though trade was their primary form of currency, considered these exchanges to be of major importance (Galbraith, 1987). Business men and women around the world continue to reflect these ideals, indicating that trade is still one of the most important factors to consider in terms of the world’s economy. We continue to develop new technologies and concepts that will allow us to achieve our goals quickly, so that we may profit in exchange.

One basis of trade that is consistent between the establishment of classical trade theories and trade in the modern era is the integration of the idea of mercantilism (Galbraith 1987). When this philosophy was established 300 years ago, it was done in response to the lack of a national trade economy and marked a shift from feudalism to capitalism. Furthermore, this policy established the prevalence of the middle class and provided the opportunity for individuals to earn their wealth through business. Mercantilism is at the center of the trade spirit today, and developed into the concept of the free market in many first world nations. Businessmen continue to piggyback off the phenomena that jumpstarted the ability for people to conduct international trade, emphasizing the importance of avoiding governmental regulation of trade. As a consequence, the prices of goods currently on the market reflects their supply and demand, which enables individual’s to master trade based on an understanding of wants and needs.

Interestingly, mercantilism led to the establishment of currency, which allows trade to be conducted more simplistically today. Although a variety of different precious materials were utilized for early money by different cultures, creating a gold standard has allowed many different countries to understand the conversion value of many different products, facilitating the ease of trade. Therefore, a pattern that was created in the 1700s to assist trade still benefits us today, and continues our ability to reach out to the world market with some level of monetary consistency.

A classical trade theory established by Adam Smith is referred to as the “Absolute Advantage” model and states that the value of goods can be determined by measuring the amount of labor that goes into their production (Buchholz 2001). Essentially, it is profitable to export goods provided that other goods could be imported and modified to suit the needs of consumers. This led to many production, import, and export possibilities, in addition to the consideration that different combinations of these factors can lead to varying degrees of profitability. Modern business still utilizes this model, as it has established a mathematical measurement of success. Goods produce the greatest extent of profit when they are produced cheaply and we can take advantage of trade relationships to ensure that this occurs. For example, many companies in the United States contract factories in China to produce components of their products. Since this can be done cheaper in China compared to in the United States or other North American territories, it is more profitable for these companies to have work done abroad and import these products, finishing their construction locally for sales.

While importing and exporting goods appears to be a common business practice, these efforts were conducted repeatedly during the 16th and 17th centuries (Case et al., 1999). For example, many noble and royal families desired precious stones that were not available to them locally. Therefore, they had these goods imported from many different areas and then would contract a metal smith in order to use these in the construction of jewelry product. Although these individuals did not intend to sell such items, they took advantage of the economical concepts that occurred prior to the establishment of the Absolute Advantage model without being aware of this.

It is also important to consider that the development of classical trade theories were only possible due to the technological developments of transportation that had occurred during each relevant time period. One of the first technological advanced was the development of the canoe, which allowed people to travel using rivers and streams. Once people recognized the value of such travel, there was a slow technological revolution that enhanced the way that water travel was done. For example, during the Industrial Revolution, steam boats allowed people to successfully travel further than they ever had before. This allowed land trade to be replaced by sea trade, as journeys to far away countries were considered less strenuous. Ultimately, this pattern of technological development has continued today. Although inventions such as the airplane were intended primarily for the transportation of people, they have been adapted to accommodate the delivery of goods. Furthermore, the internet has become a mode of digital trade, allowing individuals from across the world to engage in bargains using a few button clicks. It is interesting when considered that basic human communication and the recognition of the value of travel sparked the idea for this particular use of the internet.

Shortly after Adam Smith established his theory of Absolute Advantage, David Ricardo expanded upon his ideas by determining that if a country had no absolute advantages for their products, they could benefit by engaging in comparative advantage (Case et al. 1999). Ultimately, this type of trade benefits countries who each are able to specialize in producing a particular product based on their culture and related expertise. Countries should export products if they can be cheaply made compared to the cost of production in other nations, allowing these nations to purchase the item more cheaply than they can produce it themselves. Furthermore, products should only be imported using the same principle. Therefore, Ricardo’s principle creates a win-win relationship between trade partners. This principle is still a pattern of trade today due to its marked success throughout history (Samuelson 2001). A modern example of this trade policy in effect is the import of cars into the United States because the materials and labor costs used to build them are cheaper overseas then they are domestically. Furthermore, the United States is a leading exporter of internet intellectual property, because the infrastructure of these agencies are already well established and this software is built more efficiently within the country than among its foreign trade partners.

When examining the aforementioned classical trade theories, it appears that our ways of conducting trade has not evolved much past our understanding of these concepts in the 1700s. Ultimately, we still value the free market, which is evident by our ability to do business based on the wants and needs of individuals. Furthermore, we are concerned with maximizing our profit regardless of the products that are produced, so it is important to focus on which goods are imported and exported to ensure that the best possible opportunity is achieved. Doing so required a certain knowledge and understanding of a nation’s trade partners in addition to establishing positive international relations with countries that are able to produce products more cheaply and will therefore be more likely to export a particular good. This was also the case of countries during the time that classical trade theories were developed. It was simple to trade with countries in which there were already international agreements, such as those that allowed for war protection. In the same manner, international agreements can make trading more complex. For example, the current conflict between the United States and several countries in the Middle East make it more difficult to obtain oil at a reasonable price, which also has a direct impact on the economy of the country.

Ultimately, it is essential to consider that the trade relationship between nations has always been complex, and the modern era is no exception to this rule. The ability to trade with ever increasing nations and populations means that it is important for business professionals to carefully consider their business moves and to determine all financial possibilities (Samuelson, 2001). Since there are many different ways that a particular product can be made on the basis of imports and exports, economists have developed mathematical models that account for many different variables to ensure the accuracy of this process. While the process was somewhat less complex when the classical trade theories were developed, it was still important for these individuals to consider trade patterns in addition to the rules that would make different trades more or less effective.

In conclusion, trade has been evolving since the first man made contact with a different civilization. In the beginning, effective trade simply meant the ability to reach another group of people and to acquire a good that would be a necessity for survival. As time continued, effective trade meant modifying technology and relationships to ensure that these needs could be met. In the modern era, trade is a way of life. It would not be possible for us to have acquired our many modern conveniences if this process were not in place. In order for this to continue, it is necessary to keep legal policies in place that encourage the open trade of many different nations. Furthermore, considering that this process impacts the world economy, it also calls for a need for collaboration and carefully calculated trading plans. It is expected that trade will continue to evolve into the future, and that it will become even more efficient.

References

Buchholz T (1999) New Ideas from Dead Economists: An introduction to modern economic thought. Penguin Books.

Case KE, Fair RC (1999)Principles of Economics (5th ed.). Prentice-Hall.

Galbraith JK (1987) Economics in Perspective: A Critical History. Boston: Houghton Mifflin.

Samuelson PA (2001) Ricardo, David (1772–1823). International Encyclopedia of the Social & Behavioral Sciences, pp. 13,330–13,334.

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