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Trade Policy

In: THE LIMITS OF FISCAL, MONETARY, AND TRADE POLICIES International Comparisons and Solutions

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  • Jonathan E Leightner

Abstract

Most economists, including the author of this book, firmly believe that both traders gain from naturally occurring trade. These gains are illustrated in the Theory of Comparative Advantage which was developed by David Ricardo (1817). This theory can be applied to individuals, cities, states, provinces, nations, or continents. For example, assume that Dr. Frankenstein can dig up six corpses in a night or stitch together three monsters, whereas Igor can only dig up four corpses in a night or stitch together one monster. Note that Dr. Frankenstein is better at both digging up corpses and stitching together monsters. Does this mean that he should fire Igor? No, because Igor gives up less to dig up corpses than Dr. Frankenstein gives up. For every corpse that Dr. Frankenstein digs up, he forgoes stitching a half of a monster (3 stitched/6 dug up). For every corpse that Igor digs up, he forgoes stitching up a fourth of a monster (1 stitched/4 dug up). Therefore, Dr. Frankenstein and Igor can gain if they specialize and trade — Igor digging and Dr. Frankenstein stitching…

Suggested Citation

  • Jonathan E Leightner, 2014. "Trade Policy," World Scientific Book Chapters, in: THE LIMITS OF FISCAL, MONETARY, AND TRADE POLICIES International Comparisons and Solutions, chapter 5, pages 63-95, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814571883_0005
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