Free Trade Models
1. Mercantilism: Mercantilism is a trade theory focused on maximizing revenue through the export of goods and services. It was prevalent in Europe from the 16th to the 18th centuries. The central objective of mercantilism is to achieve a favorable balance of trade where a nation’s exports surpass the value of its imports. This theory often advocates imposing high tariffs on imported manufactured goods. The rationale is to prevent trade deficits, where a nation’s spending on imports exceeds its earnings from exports. An example is the historical use of mercantilist policies by the United States, which, over time, contributed to a persistent trade deficit since 1975. However, as the global landscape shifts towards reducing tariffs, mercantilism has diminished in popularity, giving way to free trade agreements and non-tariff trade restrictions.
2. Comparative Advantage: The theory of comparative advantage, given by English economist David Ricardo in his 1817 publication Principles of Political Economy and Taxation, maintains that engaging in free commerce and collaboration benefits all nations. According to this theory, a nation possesses a comparative advantage when it can produce goods and provide services at a lower cost than other nations. This principle aligns with the broader notion of globalization, suggesting that open worldwide trade enhances the standard of living across countries. Comparative advantage stands in contrast to absolute advantage, where a country can produce more goods at a lower unit cost than others.