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Write a summary relating to two theories of absolute and comparative advantage developed by Smith and Ricardo had a significant influence on the perception of international trade.
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The two theories of absolute and comparative advantage developed by Smith and Ricardo had a significant influence on the perception of international trade. While Smith's theory was given preference in the past, it has been argued that Ricardo's theory is more relevant in the modern world.
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What could be a reference for this essay?
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Journal of Economic Issues
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Erasmus Journal for Philosophy and Economics
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Provide an essay relating to two theories of absolute and comparative advantage developed by Smith and Ricardo had a significant influence on the perception of international trade. Exapnd on the summary above.
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#Absolute and Comparative Advantage Theories by Smith and Ricardo Essay
Adam Smith and David Ricardo had a significant influence on the perception of international trade by developing their theories of absolute and comparative advantage. These approaches have long affected economic relations and dictated the rules of play. Nevertheless, as time passed, other theorists started to argue the foundations of these theories, such as complete employment, free trade, and global allocations of products manufactured on a country basis without the existence and interference of multinational enterprises. These questions were investigated by many scholars from all over the globe.
To begin with, Adam Smith’s theory of absolute advantage is the foundation of Ricardo’s theory of comparative advantage. The latter was given preference because it is believed that Smith’s theory is not applicable to the real world. However, according to Schumacher (2012a), this belief is based on excerpts from Smith’s theory instead of his original work. Based on this assumption, the author claims that the theory of absolute advantage is still relevant in the modern world due to the fact that some concepts such as specialization and economy of scale were mentioned in his original work – The Wealth of Nations, but ignored in textbooks.
Moreover, Smith should be appraised for his dynamic approach to perceiving production and technological change, which derive from the alterations of the global economic environment and international trade. The overall conclusion of the whole paper is the following: a dynamic theory of absolute advantage cannot be seen as the basis of Ricardo’s static theory of comparative advantage.
On the other hand, Palley (2008) argues that the perception of comparative advantage has changed over time. His assumptions are based on the works of Samuelson and Gomory, and Baumol. The author believes that comparative advantage is dynamic, as it is influenced by the changes in the global economy, international demand and supply, and distribution of advantages from becoming involved in international trade. Moreover, according to Palley (2008), the influence of unemployment on trade is positive because of inadequate demand for the workforce, while the impact of globalization is seen as negative due to deteriorating influence on domestic innovations and science. Finally, this theory should be viewed from the perspective of modern developments, i.e., high mobility of technologies and floating exchange rate.
Bearing in mind the findings of these two articles, the conclusion is evident: even though the authors focus on different theories and perceive them in a different manner (both claim that advantage is dynamic), they recognize the fact that the apprehension of the international trade and the rules of play have changed. For instance, rules for international and domestic trade are the same regardless of the traditional belief that they differ.
In addition, full employment mentioned in both theories is economically impossible and damages the development of trade ties, and jeopardizes domestic growth (Schumacher, 2012b). Furthermore, no advantage is fixed. It means that if a country possesses either absolute or comparative advantage, it is affected by external development and overall openness of the global economy, as technologies and knowledge are easily transmitted across the globe (Peng & Meyer, 2016).
In fact, it means that these advantages can be created, supplemented, or destroyed. This assumption can be explained by the constant changes in resource allocation strategies developed and implemented by both countries and multinational enterprises based on domestic and international policies and cooperation between the most influential players of the global economic environment (Madhok, Li, & Priem, 2010).