International Economics

International Economics, Part 1

Cary Shire

Strayer University

ECO 305

Dr. Joann Raphael

January 29, 2014

The 21st century has experienced nations trading with one another more than any other time in history. As a result, the global economy is directly tied to each country’s ability and willingness to engage in the international market. We will explore the theories, factors and concepts that are involved with international trade as well as the policies adopted by governments that create barriers to trade.

The world is a diverse place made up of varying geographies, weather conditions, and population densities. Consequently, we find that no two countries have the same natural or human resources to utilize toward production. Individual nations will discover that they are able to produce a certain product or service more efficiently than another nation can (Carbaugh, 2011). This concept is called specialization and is the basis of a principle that economists call absolute advantage. Adam Smith, a leading economist of the 18th century, introduced the principle of absolute advantage in his 1776 book The Wealth of Nations (Carbaugh, 2011). The principle states that “in a two nation, two product world, international specialization and trade will be beneficial when one nation has an absolute cost advantage in one good and the other nation has an absolute cost advantage in the other good” (Carbaugh, 2011, pg. 33). Smith’s writings became the basis for free trade in the 1700’s and his influence is still felt today. It was discovered, however, that trading nations can enjoy further benefits from trade that go beyond the idea of absolute advantage.

In 1800, a man named David Ricardo discovered The Wealth of Nations and expanded on Smith’s ideas with a theory he called comparative advantage (Carbaugh, 2011). Ricardo’s theory is based on the idea that two nations can successfully engage in trade with one another, whether a state of absolute...