Answer to Question #100244 in Economics of Enterprise for YT

Question

(a) How does international trade theory help to explain the existence and benefits of regional trade agreements?
(b) How might the use of a single currency within a regional trade area help with the economic growth of that area?

Answer 1

a) International trade was dealt with by many well-known economists.

 The main theories of international trade are the Mercantilist theory, The theory of absolute advantages of A. Smith, The theory of comparative advantages of D. Ricardo and D. S. Mill., Heckscher-Olin theory, Leontief paradox, Product life cycle theory, M. Porter theory, Rybchinsky theorem, as well as Samuelson and Stolper Theory.

The advantages that countries have are not once and for all data, D. Ricardo believed, so even countries with absolutely higher levels of production costs can benefit from trade exchanges. It is in the interest of each country to specialize in production in which it has the greatest advantage and least weakness and for which it is not absolute, but relative benefit is greatest - such is the law of comparative advantage of D. Ricardo. According to Ricardo, the total output will be greatest when each product is produced by the country in which the opportunity costs are lower.

Thus, a relative advantage is a benefit based on lower opportunity costs in the exporting country. Thence, both countries participating in the exchange will benefit from specialization and trade. An example is the exchange of English cloth for Portuguese wine, which benefits both countries, even if the absolute production cost of both cloth and wine is lower in Portugal than in England.

b) In the above example with cloth and wine, the use of two currencies will complicate the transaction. Since each currency has a floating rate. If the transaction is carried out in common currency, the exchange will be simpler and more understandable for its participants.