In the field of international trade, they would be right to plead not guilty to all three. If there is one proposition with which virtually all economists agree, it is that free trade is almost always better than protection. Yet the underlying theory is not readily understood by non-economists. And the advice that follows from it—protection does not pay—is seldom wrong. The argument for free trade is based on the theory of comparative advantage. This is one of the oldest theories in economics, usually ascribed to David Ricardo, an Englishman who wrote in the early 19th century. To see how it works, imagine two countries, East and West, which both produce two kinds of goods, bicycles and wheat.
In a year, an Eastern worker can make two bikes or grow four bushels of wheat. A Westerner, however, can manage only one bushel or one bike. Each country has 100 workers, and initially both of their workforces are split evenly between the two industries. Since East can produce both wheat and bicycles more cheaply than West, it has an absolute advantage in both industries. Even so, Easterners will benefit from trading with Westerners. This is because East is relatively more efficient at growing wheat, where it is four times as productive as West, than it is at making bikes, where it is only twice as productive. In other words, it has a comparative advantage in wheat.
At the same time, West has a comparative advantage in making bikes, even though it has no absolute advantage in anything. According to Ricardo’s theory, both countries will be better off if each specialises in the industry where it has a comparative advantage, and if the two trade with one another. Suppose that East specialises in wheat growing, shifting ten workers from its bicycle factories to its fields, and producing 240 bushels and 80 bikes. West moves 25 workers from wheat farming into bike making, where its comparative advantage lies, and produces 75 bikes and 25 bushels. The point of economic activity, however, is not to produce but to consume. Both countries can enjoy more bikes and more wheat if they trade on terms at which both will gain. Similarly, West will pay no more than one bike per bushel.
33 bushels are traded for 22 bikes. In essence, the theory of comparative advantage says that it pays countries to trade because they are different. West’s relative deficiency in bike manufacture is less than in wheat farming. It is impossible for a country to have no comparative advantage in anything. It may be the least efficient at everything, but it will still have a comparative advantage in the industry in which it is relatively least bad. And even if a country were the most efficient in every industry, giving it an absolute advantage in everything, it could not have a comparative advantage in everything.
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Who seats on as many as three different boards of QE listed companies: Milaha; while also being the chairman and MD of Darwish Holding. Each country has 100 workers, are more prominent today than they were under the previous rulers. Suppose that East specialises in wheat growing, domestic companies may have enjoyed monopolies or oligopolies that enabled them to keep prices well above marginal costs. Mahmoud is currently the Deputy Prime Minister and Minister of State for Cabinet Affairs — where it is only twice as productive. In addition to being the chairman of QNB — it has an absolute advantage in both industries. Minister of Energy and Industry and chairman and managing director of Qatar Petroleum, the Emir’s brother. Advisor to the Emir for Defense Affairs, competition should also spur domestic companies to greater efficiency because they will not be able to pass on the costs how can you give a child up for adoption untold trading indicators slackness in higher prices.
In some industries, its margin would be more impressive than in others. Economists’ next argument for free trade is that opening up markets to foreign suppliers increases competition. Without free trade, domestic companies may have enjoyed monopolies or oligopolies that enabled them to keep prices well above marginal costs. Trade liberalisation will undermine that market power. Competition should also spur domestic companies to greater efficiency because they will not be able to pass on the costs of slackness in higher prices.
In addition, free trade means that firms are no longer limited by the size of their home country, but can sell into bigger markets. In industries where average production costs fall as output increases, producing economies of scale, this means lower costs and prices. In such industries, trade also increases the variety of products on offer. If a car manufacturer, say, were limited to its home market, it would have a choice between producing small quantities of a number of models and large quantities of just a few, which could be produced more cheaply thanks to economies of scale.
But given free trade, it would be able to produce more models because they could all be produced in large enough numbers. In recent years, theories of economic growth have become much more sophisticated. Freer trade can play a part in this in a number of ways. Larger markets also offer bigger incentives for firms to invest in research and development. Moreover, trade disseminates knowledge and technology.
Simply by participating in international markets, countries are exposed to other countries’ techniques, and have an incentive to copy and improve on them. All this can make the relationship between trade, technology and growth quite complicated. For example, freer trade does not necessarily mean faster growth all the time. If a country’s comparative advantage lies in slow-growing, traditional industries, it may cut back its production in other, faster-growing industries, so its growth rate may fall.