In literature
The value of free trade was first observed and documented by Adam Smith in The Wealth of Nations, in 1776.[2] He wrote,
- "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy (buy vs. build). . . 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."[3]
This statement uses the concept of absolute advantage to present an argument in opposition to merchantilism, the dominant view surrounding trade at the time, which held that a country should aim to export more than it imports, and thus amass wealth.[4] Instead, Smith argues, countries could gain from each producing exclusively the good(s) in which they are most suited to, trading between each other as required for the purposes of consumption. In this vein, it is not the value of exports relative to that of imports that is important, but the value of the goods produced by a nation. The concept of absolute advantage however does not address a situation where a country has no advantage in the production of a particular good or type of good.[5]
This theoretical shortcoming was addressed by the theory of comparative advantage. Generally attributed to David Ricardo who expanded on it in his 1817 book On the Principles of Political Economy and Taxation,[6] it makes a case for free trade based not on absolute advantage in production of a good, but on the relative opportunity costs of production. A country should specialize in whatever good it can produce at the lowest cost, trading this good to buy other goods it requires for consumption. This allows for countries to benefit from trade even when they do not have an absolute advantage in any area of production. While their gains from trade might not be equal to those of a country which is more productive in all goods, they will still be better off economically from trade than they would be under a state of autarky. [7][8]
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