The genesis of free trade theory in many ways starts with the man many consider to be the Father of Capitalism, Adam Smith. He addressed the issue several hundred years ago in his famous book “The Wealth of Nations”. There he showed how two countries specializing in producing and trading goods in which they have an absolute production (cost) advantage over the other country could benefit from trade. Here we give an example of “comparative advantage”. The theory of comparative advantage goes one step beyond notions that Smith talked about in The Wealth of Nations. The comparative advantage theory of David Ricardo (which builds upon Smith’s theory), and which we discuss in this video, shows how nations producing and trading in goods in which they have a comparative advantage benefits BOTH of the trading countries, even if one country is better at producing both of the goods that both countries produce. The example in this video demonstrates, in concrete quantitative terms, the mutually beneficial increase in wealth generated by free trade.
While, the examples Smith and Ricardo give are, of course, simplistic and contain some unrealistic assumptions, the theory does appear to make logical sense. Moreover, most economic research probably can be read to support arguments in favor international trade (albeit with varying degrees of freedom). One major issue that is either often overlooked by politicians and/or which clouds contemporary debate about the desirability of free trade is simply this: Assuming, arguendo, that Ricardo and Smith are correct about the generally positive economic benefits of free trade, the fact of the matter is that their theories say absolutely nothing about how the additional wealth generated by free trade is distributed throughout a country to its general population. Who shares in the additional wealth created by trade? Is it just upper management, corporate executives and shareholders of the trading companies that benefit? What about the workers? What about the taxpayer? These are key questions which are obviously very relevant to hot issues such as : (i) the increasing wealth gap between rich and poor; (ii) fair pay; (iii) the movement of jobs overseas; and, of course, (iv) the desirability of free trade and the globalization of the world economy generally.
Click here for the video: Free Trade or Fair Trade