Friday, 3 June 2011

Why is trade seen as such an important source of growth?

International trade describes the purchase and sale of goods and services between counties. Pascal Lamy, leader of the World Trade Organisation, believes that trade is one of the most important ways of achieving long-term growth. Ricardo's theory of comparative advantage highlights one of the key benefits of international trade, namely that specialisation and trade leads to mutual gain for the countries involved. Comparative advantage says that even if England has absolute advantage in the production of two goods, they can still trade Zimbabwe given that that Zimbabwe has a lower opportunity cost of production for one of the goods. After trading, then, both the UK and Zimbabwe would be producing more goods than they were before, and, assuming they were producing at full capacity, that means they would be producing outside their PPC. 

Trade, therefore, increases productive capacity, as well as overall production, which is the definition of growth. There are other benefits to trade, including increases in domestic efficiency as markets become more competitive. International trade (particularly between developing and developed countries) can lead not only to better political relations, but also to technological advancements being made by the developing country as a result of importing technology that they don't perhaps have the resources to innovate themselves.

3 comments:

  1. If trade is so important why a) did Doha talks fail and b) why is there a CET for Europe?

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  2. The CET is so that intra-europe trade is given preference over trade with other countries. This means that the benefits of trade are experienced more by European countries.

    It is also so that one country cannot act as a "gateway" to the rest of the EU. If, for example, Germany's tariffs were very high, but Greece had very low tariffs, China could export to Greece and then, from there, export to Germany (as there are no barriers to trade between EU countries)

    The Doha talks failed for a number of reasons (mainly political). Right from the word go, critics were charging that the round would expand a system of trade rules that were bad for development and interfered excessively with countries' domestic "policy space".
    The final straw was the disagreement between India and the USA over the "special safeguard mechanism" (SSM). The SSM was a measure designed to protect poor farmers by allowing countries to impose a special tariff on certain agricultural goods in the event of an import surge or price fall.

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