International Business Essay Example | Topics and Well Written Essays - 2000 words - 1

International Business - Essay Example Globalization has further increased international trade as now countries are able to trade easily through flexible negotiations that will put away restrictions that may undermine trade between countries (Reuvid & Sherlock, 2011). International trade has provided grounds for increased competition, and this means that there are competitive prices in the market, which will see to it that consumers benefit from quality products, which are offered at low costs. International trade has resulted to the global economy which operates on the forces of demand and supply meaning that the prices of products are affected by events that occur globally (Aswathappa, 2010). For example, the political unrest in Libya caused the prices of gas to inflate in the whole world, and this clearly shows how the global economy works. Research shows that international trade is focused on by nations so that the citizens’ standards of living can be increased through the provision of various products and crea tion of job opportunities. International trade theories provide explanations, which will elaborate on the patterns global trade takes and the benefits that arise from it. The theories gives reasons as to why nations trade and why it is good to trade. This paper seeks to explain the theories that explain why countries engage in international trade and goes ahead to explain the benefits that countries get from international trade. Mercantilism Theory This theory was in application in the economic system of the 16th to 18th centuries, and its main objectives was to increase the wealth of a nation imposing regulations on the governments interests so as to ensure that the government had control on all of them (Ajami & Goddard, 2006). It was based on the fact that countries could accrue wealth in the form of precious metals, which is not practical because if every country decided to want to export and not importing from other countries, the worldwide economy would be sluggish due to restr iction of free trade. The theory was mainly used by colonial governments such as Britain, France and Spain, which practiced the zero-sum –game that implied that wealth was scarce and countries could only benefit by taking advantage of the resources of their neighbors (Kerr & Gaisford, 2008). These governments would take advantage of their colonies by charging them high prices for imports and low for their own exports. This theory is seen as a hindrance to international trade as it was seen to favor exports and hinder imports in the colonial countries. Absolute Advantage Theory This theory was developed by Adam Smith (1776) and explains that a company has an advantage if it can produce the more products with similar resources or the same amount of products using fewer resources than its trading partners (Ajami & Goddard, 2006). With this in mind it follows that the country with the absolute advantage will be able to produce and export commodities at a lower cost than its tradi ng partners, and this will be the basis of its trade relations with the partners. This is because the absolute advantage will have the propensity to reduce costs of production and at the same time increase profits which will in turn boost the economy. This theory further explains that market forces should determine trade and restrictions such as tariffs and quotas should be eliminated hence this destroys