International Trade and Wealth (Part 1)

International Trade and Wealth (part 1)

Adam Smith may be a little bit passé but there are a couple of economic theories that still apply to international trade. These are the theories of “Absolute Advantage” and “Comparative Advantage”. Basically according to these theories when trade takes place between countries wealth is created beyond the actual value of the trades.

“Absolute advantage” assumed that a nation would export items that it produce more efficiently than other nations and import items that other nations produced more efficiently. The theory of “Comparative advantage” says that even if one country produces items less efficiently than another country, it could still get an advantage by producing the item(s) that it produced most efficiently and importing the item(s) that it produces less efficiently.

In order to demonstrate the creation of wealth one needs to understand the “production possibilities” of the countries being compared. “Production possibilities designates the capabilities of a country to produce goods when all of its factors of production are fully and efficiently employed” The next section of this blog will demonstrate how wealth is created. This article and the following articles on this subject draw very heavily on an economics textbook by Franklin R. Root called “International Trade and Investment” The sentence above in quotation marks is a direct quote from that book.

David Segrest is a REALTOR in Charlotte NC. His website is http:www.segrestrealty.com .