Economics Case Study Example | Topics and Well Written Essays - 2000 words

Economics - Case Study Example To earn the wealth countries need to trade and maximize the difference in their balance of trade by maximizing exports that is a source of generating revenue and minimize imports that cost it to pay. There were two types of manufacturers; one who were export oriented and others who were domesticated with their products. Export oriented manufacturers favored the mercantilist approach and believed in subsidies, tax rebates etc. to increase their sales to foreign countries. But the domestic manufacturers foresee threats to their produces and wanted tariff quotas and stringent policies to restrict the trade. This mercantilist theory was before Adam Smith's. Then came the theory of absolute advantage; according to Adam Smith countries should export goods in which they have an absolute advantage and import other goods from countries that have absolute advantage in producing them i.e. goods in which they are more productive. Adam Smith's criticism to Mercantilists approach was that it confused the accumulation of treasure with the accumulation of wealth. The gold and silver that the country holds is not the wealth of the country. Wealth of a country according to him is measured by the wealth that the nationals of the country hold. And thus use the term absolute advantage to compare the productivity of people with other people, firms with other firms or between nations. The contemporary of Adam Smith was David Ricardo, who gave the concept of comparative advantage; according to Ricardo if there is no difference in productivity then there is no absolute advantage and hence no trade will take place amongst countries. There are some subtle and slight differences among the absolute and the comparative advantage theories, but it is important to take into account the differences. Firstly, as the term absolute and the comparative in the name themselves suggests that Adam Smith's theory takes absolute measures of productivity to compare and David Ricardo's relative measures to compare the productivity amongst the nations. Therefore if absolute productivity is same then trade should not occur according to Adam Smith but Ricardo suggests that it is important to look at the relative productivity for the trade to occur or not. Adam Smith's trade theory does not incorporate any differences that might arise from the different use of technology or probably the difference in the combination of the labor or capital input used. David Ricardo's model has an inherent assumption and a more practical approach that tells that countries differ in their usage of production technologies such that obviously one country will be more productive in use of its resources than the other. And therefore if both the countries specialize in their production areas then output for both the countries can increase. This increase in output would be because of enhanced productivity even when no more inputs are put into the production process. Then countries can contract between themselves and trade goods that are there specialty i.e. import products in which other country specializes and export in which it has its specialization. Then both countries can benefit from one another. Adam Smith's absolute