Discuss how the GVCs (global value chains) today have complemented conventional free trade theories
economics
Description
Choose two assumptions you think most unreal in free trade theories. Discuss how the GVCs (global value chains) today have complemented conventional free trade theories.
This should be at least one full page, or more, single-spaced that completely answers the question above. You should use 3 or more academic, peer-reviewed sources from credible collegiate approved locations. The first source should be Michael P. Todaro & Stephen C. Smith, Economic Development, 12th Ed. Addison-Wesley, Inc., 2015 (ISBN 978-0-13-340678-8; ISBN 0-13-340678-4
Theories of International
Trade
A. Why do nations trade?
Advantage is behind the very reason for international trade. There are following
different types of advantage that are related to the development of theories of
international trade:
(1) Absolute Advantage
a. In a two-nation, two-product world, international trade and specialization
will be beneficial when one nation has an absolute cost advantage (that is,
use less labor to produce a unit of output) in one good and the other nation
has an absolute cost advantage in the other good.
b. For the world to benefit from international divisions of labor, each nation
must have a good that it is absolutely more efficient in producing than its
trading partner.
c. A nation will import those goods in which it has an absolute cost
disadvantage; it will export those goods in which it has an absolute cost
disadvantage.
For example:
Suppose workers in the US can produce 5 bottles of wine or 20 yards of cloth
in an hour’s time, while workers in the United Kingdom can produce 15
bottles of wine or 10 yards of cloth in an hour’s time.
In this example, clearly the US has an absolute advantage in cloth
production: that is, its cloth workers productivity (output per worker hour)
is higher than that of the UK, which leads to lower costs (less labor
required to produce a yard of cloth).
In like manner, the United Kingdom has an absolute advantage in wine
production. According to Adam Smith, who advocated the principle of
absolute advantage, each nation benefits by specializing in the
production of the goods that it can produce at a lower cost than the other
nation, while importing the goods it produces at higher cost.
