Answer to Question #323099 in Macroeconomics for Moses

Question

Using well illustrated numerical examples from a Zambian set up, kindly discuss two (2) theories that

you have learnt in class, that support the reasons why various countries engage in external trade.

Answer 1

Absolute Cost Advantage

This theory was developed by Adam Smith, he was the father of Modern Economics. This theory came out as a strong reaction against the protectionist mercantilism views on international trade. Adam Smith supported the necessity of free trade as the only assurance for expansion of trade. He said that a country should only produce those products in which they have an absolute advantage. According to Smith, free trade promoted international division of labor. By specialization and division of labor producers with different absolute advantages can always gain over producing in remoteness. He emphasized on producing what a country specializes in so that it can produce more at a lower cost than other countries. This theory says that a country should export a product in which it has a cost advantage.

Adam's theory specified that a country's prosperity should not be premeditated by how much gold and other precious metals it has, but rather by the living standards of its citizens.

Zambia has a high level of specialization in Raw Copper with a range of 612 RCA.

Comparative Cost Advantage Theory

The comparative cost theory was first given by David Ricardo. It was later polished by J. S. Mill, Marshall, Taussig and others. Ricardo said absolute advantage is not necessary. He also said a country will produce where there is comparative advantage.The theory suggests that each country should concentrate in the production of those products in which it has the utmost advantage or the least disadvantage. Hence, a state will export those supplies in which it has the most benefit and import those supplies in which it has the least drawback. Comparative advantage arises when a country is not able to yield a commodity more competently than another country; however, it has the resources to manufacture that commodity more proficiently than it does other commodities.