I. Arguments for Free Trade
A. Birth of the Free Trade Argument
1. Adam Smith (Wealth of Nations, 1776) and David Ricardo (On the Principles of Political Economy and Taxation, 1817)
2. At the time, prevailing orthodoxy=mercantilism
a. Anti-free traders-called for overt government attention to create trade surplus.
b. Worried about trade deficits, b/c thought wealth of nation depended on its stock of precious metals.
i. So wanted to max exports and discourage imports.
ii. High point in 1840s with passage of “Corn Laws” in England.
1. Still, mercantile ideas exist.
3. Smith wrote about absolute advantage.
a. Absolute advantage—one country can produce every good more efficiently than the other.
i. Use fewer factors to produce those goods.
4. Ricardo wrote about comparative advantage. (prevailing orthodoxy in the WTO) (see handout and notes on back of syllabus)
a. Key: The net welfare of society increase from free trade.
i. Net=Doesn’t mean every person wins from free trade
1. Gains and gainers outweigh losses and losers
ii. welfare=consumption and production
1. the more you consume, the better off you are
2. the more options of consumption, the better you are.
3. production wise, better off if you can specialize in that which you do best.
iii. Society=gains for trade for one country.
1. What would be the effect of England unilaterally eliminating trade barriers.
b. Now: many people claim to be free traders, but actually practice more like mercantilists
i. Rationality=people (producers or consumers) act in a rational way.
1. Act to maximize their utility (consumer satisfaction)
ii. There are only two countries in the world
1. For us (India and IRAN or rest of world “ROW”)
iii. There are only two g
portions may differ in other countries.
x. Perfect competition in the market for commodities (no monopolies)
xi. Perfect competition among factors of production (no imperfections in the markets)
xii. factors of production are mobile
xiii. Factors of production are immobile internationally
xiv. Constant returns to scale
1. no diminishing returns one unit of production directly contributes to productivity
xv. Indifference curves show the preferences of society
1. consumers don’t care as b/t choices
xvi. Relevant considerations
1. transportation costs (not in this class, but in ICI)
2. trade barriers
a. tariffs-tax imposed at the border on import
b. and non tariff barriers—anti- competitive