Mercantilism Theory: Comparative Disadvantages And Absolute Advantage

1397 Words3 Pages
bulb-icon

Recommended: Thesis on mercantilism

Introduction

Many countries followed the mercantilism theory trying to become self-sufficient. However, economists believe that if countries who engage in international trade can benefit more under that environment. There are two main theories supporting free trade: absolute advantage and comparative advantage. (Daniels et al, 2015). Absolute advantage was a theory created by Adam Smith suggesting that different countries produce some goods better than others and that unrestricted trade would allow these countries to specialize in the products that give them a competitive advantage. (Daniels et al, 2015)
David’s Ricardo theory, on the other hand, suggests that global efficiency gains may still result from trade if a country specializes in what it can produce more efficiently. (Daniels et al, 2015)
On the basis of comparative advantage, free trade agreements were promoted (GBF, 2013) along with the World Trade Organization (WTO), which ensured the opening of new markets.
FTAs, are considered as an important tool, adopted by governments, to …show more content…

Low tariffs on import increases jobs outsourcing which will negatively affect the employment opportunities in developed countries. The RTA signed between US, Mexico and Canada (NAFTA) reduced tariffs on imports allowing foreign companies to expand and outsource their production. (EPI, 2003) As a result, the bargaining power of American workers was undercut. (Faux, 2013) NAFTA caused the loss of 700,000 jobs as the production moved to Mexico. The jobs lost were mainly from California, Texas and Michigan, where the majority of US manufacturing relies. Besides that, the majority of the workers who lost their jobs suffered a permanent loss of income. (Faux, 2013) Moreover, NAFTA enabled the US employers to force workers to accept lower wages and benefits and blackmail local governments into giving tax reductions for their corporations and other subsidies. (Faux,

Show More
Related

  • Mercantilism And Capitalism In The 17th And 18th Century

    91 Words  | 1 Pages

    Mercantilism and capitalism both have to do with money accumulation. Capitalism are businesses controlled by private owners. Since they own the business and the government doesn’t all the profit from the work they’ve done and the trades they’ve made goes to them. Mercantilism are countries that are exporting more goods than their importing. In 17th and 18th century this system was used by British government to restrict how the colonies spent their money. Capitalism is the making of the money in a country, and mercantilism is making money from other

    Read More

  • Comparative Analysis of Northern and Southern Colonies

    733 Words  | 2 Pages

    When comparing and contrasting the Northern and Southern colonies throughout their development, it is vital to fully understand that each colony differed as a result of their reasons for settlement, geographic setting, and economic establishment; however, the colonies were additionally equivalent with regards to their social perceptions and standards of mercantilism.

    Read More

  • Reasons Behind Signing the Declaration of Independence

    859 Words  | 2 Pages

    Based on England’s salutary neglect toward the colonies, their policy of mercantilism, and the fact that no colonists were represented in Parliament, I would have signed the Declaration of Independence.

    Read More

  • Mercantilism and Salutary Neglect: Historical Impact

    312 Words  | 1 Pages

    Throughout the course of history, new ideas have emerged and often changed relationships in society. Different historical circumstances are the reasons these ideas have come up. England and the thirteen colonies have had both positive and negative effects on their relationships due to these ideas. For example, two ideas were the Theory of Mercantilism and Salutary Neglect.

    Read More

  • The Pros And Cons Of NAFTA

    1027 Words  | 3 Pages

    On January 1st, 1994, a treaty that created the largest free trade area were signed into place by the trilateral of United States, Canada, and Mexico. NAFTA is a promise made by world’s most significant corporations claiming to create many high paying jobs and raise the standard of living in the US, Canada and Mexico. As we approach its 21st birthday, NAFTA now links 450 million people producing trillion dollars’ worth of goods and services each year. However, behind this seemingly good deal, it also created many underlying issues. Beginning with NAFTA giving corporation opportunities to move factories aboard to the lower-cost Mexico. Manufacturing aboard did not only outsourced American jobs, it also caused manufacturers that remained to lower

    Read More

  • The Failure of the North American Free Trade Agreement

    1348 Words  | 3 Pages

    NAFTA's promoters promised 200,000 new jobs per year for the U.S., higher wages in Mexico and a growing U.S. trade surplus with Mexico, environmental clean-up and improved health along the border. The reality of the post-NAFTA surge in imports from Mexico has resulted in an $14.7 billion trade deficit with Mexico for 1998. By adding the Mexican trade deficit to the deficit with Canada, the overall U.S. NAFTA trade deficit for the year 1998 is $33.2 billion dollars. In the last five years we have gone from a pre-NAFTA trade surplus of $4.6 billion with Mexico to a $14.7 billion deficit. Using the Department of Commerce trade data in the formula used by NAFTA proponents to predict job gains, the real accumulated NAFTA trade deficit would translate into over four hundred thousand U.S. jobs lost.

    Read More

  • Mercantilism In America

    2010 Words  | 5 Pages

    1. Choose two events that paved the way for European voyages of exploration and discuss how

    Read More

  • United States Trade Policy: Current and Future Role in a Global Economy

    2527 Words  | 6 Pages

    The United States has for over two centuries been involved in the growing world economy. While the U.S. post revolutionary war sought to protect itself from outside influences has since the great depression and world war two looked to break trade restrictions. The United States role in the global economy has grown throughout the 20th century and as a result of several historical events has adopted positions of both benefactor and dependent. The United States trade policy has over time shifted from isolationist protectionism to a commitment to establishing world-wide free trade. Free trade enterprise has developed and grown through organizations such as the WTO and NAFTA. The U.S. in order to obtain its free trade desires has implemented a number of policies that can be examined for both their benefits and flaws. Several trade policies exist as options to the United States, among these fair trade and free trade policies dominate the world economic market. In order to achieve economic growth the United States has a duty to maintain a global trade policy that benefits both domestic workers and industry. While free trade gives opportunities to large industries and wealthy corporate investors the American worker suffers job instability and lower wages. However fair trade policies that protect America’s workers do not help foster wide economic growth. The United States must then engage in economic trade policies that both protect the United States founding principles and secure for tomorrow greater economic stability.

    Read More

  • Negative Effects Of NAFTA

    1300 Words  | 3 Pages

    The NAFTA is involved in this phenomenon because since the agreement involves Mexico it in turn creates job opportunities for the Mexicans and on top of that Mexican workers are part of an underdeveloped country which in turn means they are going to get less money due to the condition of their economy. And for American businessmen that is a very desirable quality in a potential employee due to how much profit the companies and factories will make simply by giving more low paying jobs to Mexicans and decreasing the American workforce. This source relates to economic globalization, because the NAFTA is essentially an economic agreement between major countries to save money and reduce trading taxes. This agreement causes an economic rise in all of these countries by causing an increase in jobs in Mexico and increasing companies’ profits in the US and

    Read More

  • Essay On NAFTA

    624 Words  | 2 Pages

    The goal of NAFTA was to systematically eliminate most tariff and non-tariff barriers to trade and investment between the countries. NAFTA has allowed U.S., Mexico, and Canada to import and export to other at a lower cost, which has increased the profit of goods and services annually. Because the increase in the trade marketplace, NAFTA reduces inflation, creates agreements on intern...

    Read More

  • Globalization: The European Union, the ASEAN Group, and NAFTA

    3413 Words  | 7 Pages

    Globalization has become one of the most influential forces in the twentieth century. International integration of world views, products, trade and ideas has caused a variety of states to blur the lines of their borders and be open to an international perspective. The merger of the Europeans Union, the ASEAN group in the Pacific and NAFTA in North America is reflective of the notion of globalized trade. The North American Free Trade Agreement was the largest free trade zone in the world at its conception and set an example for the future of liberalized trade. The North American Free Trade Agreement is coming into it's twentieth anniversary on January 1st, 2014. 1 NAFTA not only sought to enhance the trade of goods and services across the borders of Canada, US and Mexico but it fostered shared interest in investment, transportation, communication, border relations, as well as environmental and labour issues. The North American Free Trade Agreement was groundbreaking because it included Mexico in the arrangement.2 Mexico was a much poorer, culturally different and protective country in comparison to the likes of Canada and the United States. Many members of the U.S Congress were against the agreement because they did not want to enter into an agreement with a country that had an authoritarian regime, human rights violations and a flawed electoral system.3 Both Canadians and Americans alike, feared that Mexico's lower wages and lax human rights laws would generate massive job losses in their respected economies. Issues of sovereignty came into play throughout discussions of the North American Free Trade Agreement in Canada. Many found issue with the fact that bureaucrats and politicians from alien countries would be making deci...

    Read More

  • Krugman's Is Free Trade Passe?

    1098 Words  | 3 Pages

    Krugman defines comparative advantage as “the view that countries trade to take advantage of their differences” (1987, p. 132). Comparative advantage theories assume constant returns to scale and perfect competition. Krugman writes that trade exists when countries differ from one another in goods they have to offer, technology, or factor endowments. Although there are multiple models explaining the cause of trade, each differs as to what factors are included to explain why trade takes place. Economist Ohlin and authors Burenstam-Linder and Vernon began introducing counter-points to comparative advantage as early as the late 1950’s, saying that formal models of comparative advantage did not take into account all factors affecting international trade. International specialization and trade caused by increasing returns, as well as economies of scale and techn...

    Read More

  • The Role of Government Intervention in Developing Nations Economy

    1825 Words  | 4 Pages

    All nations can get the benefits of free trade by being specialized in producing goods they have a comparative advantage and then trade them with goods produced by other nations in the world. This is evidenced by comparative advantage theory. Trade depends on many factors, country's history, institution, size and. geographical position and many more. Also, the countries put trade barriers for the exchange of their goods and services with other nations in order to protect their own company from foreign competition, or to protect consumers from undesirable products, or sometimes it may be inadvertent.

    Read More

  • Comparative Advantage Case Study

    1112 Words  | 3 Pages

    The Law of Comparative Advantage was introduced by David Ricardo in 1817 in his book ‘Principles of Political Economy and Taxation’. According to this classical theory, a comparative advantage exists for a country when it has a margin of superiority in the production of a certain commodity over others. Comparative advantage results from differing endowments in the factors of production like technology, natural endowments, climate, etc. among different countries. Therefore, each country exports the commodities which it can produce at a lower opportunity cost or, in other words, lower marginal cost of production and imports the rest. This would ultimately be beneficial for all countries engaging in free trade as each would gain through its specialization

    Read More

  • Advantages And Disadvantages Of International Trade

    1063 Words  | 3 Pages

    Trade is more than the exchange of goods and services; it sows the seeds for growth, development and provides the knowledge and experience that makes development possible (Cho, 1995). Trade is considered one of the main driving forces behind economic growth and poverty reduction, especially in Africa (Fosu and Mold, 2008). Adam Smith’s 1776 theory of absolute advantage states that a trading nation can gain by specialising in the production of the commodity of its absolute advantage and exchanging part of this output with other trading partners for the commodities of its absolute disadvantage (Llorah, 2008). This process enables countries to extend beyond their borders, allowing greater specialisation in production, enhanced effectiveness in use of thin resources, the growth of national income, the capacity to accumulate independent wealth and enhances the growth of the economy (Cho, 1995). According to DFID’s report, Trade Matters, other positive derivatives include raised employment, increased household income and the chance for people to earn their way out of poverty, independent of aid (DFID, 2005). The role of trade, while strongly advocated, is still highly debated (Collins and Graham, 2004; Madeley, 2000) and many recent studies question the positive role of economic growth on open trade (Bene, 2009). The extensive arguments surrounding this controversial discussion empirically highlight the difficulty in isolating the effect of trade liberalisation on economic growth, although it is clear that it does, and will continue to have, an important role in poverty alleviation.

    Read More

More about Mercantilism Theory: Comparative Disadvantages And Absolute Advantage

Open Document