The Basis of Orthodox Economics

The Basis of Orthodox Economics - The Basis of Orthodox...

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The Basis of Orthodox Economics All countries gain from trade. What is the basis of this orthodox economics conclusion? Do you agree? Why or why not? 'All countries gain from trade'. What is the basis of this orthodox economics conclusion? Do you agree? Why or why not? To fully understand this concept it if first necessary to find out where it came from. The main economic theory behind this argument is that of comparative advantage. It is also necessary to understand the absolute advantage theory. Both Adam Smith brought these theories forward but David Ricardo developed them in the early part of the 19th century to better fit the modern world. In this essay I will try to show how countries benefit from trade and why sometimes trade is not advantageous. We must assume that each country has 6000 hours of labour and that they divide this labour equally between the two goods. It can be seen that the world production of watches and phones is 310 and 70 respectively. If both countries only produce the good they have an absolute advantage in i.e. Bulgaria produces watches and Morocco phones, then the world output increases to 600 watches and 120 phones. Thus if the countries trade under free trade laws they will both be better off since they will have more goods for the same amount of labour hours. Comparative advantage theory is a modification of the above absolute
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This note was uploaded on 03/10/2012 for the course ECON 101 taught by Professor Johntaylor during the Spring '11 term at University of South Florida.

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The Basis of Orthodox Economics - The Basis of Orthodox...

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