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Free Trade And Globalization In The Wealth Of Nations By Adam Smith

1255 words - 6 pages

In the modern world of contemporary economics trade liberilisation and globalization are constantly debated topics. One side of the arguing that free trade and globalization will lead ultimately lead to developing countries being alleviated of poverty and developed nation’s GDP will reflect an increase that would otherwise be unattainable. The other side of the argument however claims that there is already contrary evidence that the introduction of free trade unfairly favors developed nations and that it cripples infant industries. Below will be elaborated on globalisation and trade liberilisation, also relations to international trade theories from David Ricardo, David Ricardo and the ...view middle of the document...

The produces would be traded between countries, allowing all economies to achieve that would otherwise be unachievable without international free trade (Smith 1904).

In 1817 the previous theory was extended by David Ricardo by raising the idea of a comparative advantage between countries and established trade as a positive sum game (Nafziger 2006). Evidence of the theory that trade liberilisation will lead to economic growth can be seen when comparing countries with free trade policies such as Hong Kong and Singapore, against other global economies. It is important to compare these economies with not only countries that have high level of protectionism but also with countries that have a moderate level of free trade in their economy. This ensures that the performance of the global economy is taken into account. Hong Kong’s and Singapore’s average annual gross domestic product (GDP) growth from 1960 to 1990 were 6.5% (Schenk, 2010) and 8% respectively. This compared to the 3.3% OECD average. Singapore and Hong Kong have been ranked in the top 5 of countries in the world for GDP growth since 1960 (Cahyadi, Kursten, Weiss & Guang, 2004). Although a catalyst for growth trade liberilisation is not without its critics.

The Hecksher-Ohlin theorem expands on the theory of comparative advantage and helps to explain production and trade patterns between countries. The theorem states that a country will export commodities that require its abundant factors intensively for production and import commodities that use its scarce factors intensively (Feenstra, 2004). This can be seen in the case of the New Zealand economy that exports commodities that we use our naturally abundant resources intensively. These are agricultural commodities such as: milk powder, beef and lamb. It makes sense for us to produce these products as they use factors of production that are relatively abundant and therefor cheaper to producers. In 2011 agricultural exports accounted for 71% of New Zealand’s export revenue (“Ministry for Primary Industries,” 2012). Compare this to New Zealand’s imports for the same year. Mineral fuels accounted for 17.1% of the total imports, making it the most imported commodity (“Treasury, 2012). Mineral fuels are commodities that require factors of production which are relatively scarce in New Zealand. This means that it is economically sound for New Zealand to follow the Hecksher-Ohlin trade theory and trade with countries that have a comparative advantage in producing goods that they have an absolute or comparative advantage in producing. 
 
Critics of trade liberilisation argue that while free trade may cause an overall economy to grow it also increase inequality within poorer countries (Fletcher, 2011). This goes against the World Trade Organisation’s argument that all the boats rise with the tide (Hassoun, 2011). This is evident in Columbia,...

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