Question

Name 2 theories of international trade which claim that the government has an important role to play in international trade. Explain the role of the government in these theories. Why do we need the government to play this role

Answer 1

Mercantilism and Absolute, Comparative Advantage

Step-by-step explanation:

Theories of International trade study the exchange of goods, services, factors, capital among different countries.

Two theories of international trade, claiming important role of government in international trade, are:

Mercantilism : This theory states that an economy can prosper with wealth by accumulating maximum gold & silver reserves, by increasing exports & decreasing exports. It also suggests that government should play this role of imports discouragement, exports encouragement to maintain trade surplus & hence wealth.

Theories of Absolute & Comparative Advantage ; given by Adam Smith & Ricardo suggest that : Economies having absolute or comparative advantage in production of a good, of producing the good at a lower explicit cost or opportunity cost respectively - should produce & export the good of their advantage & import the other good (from economy having advantage in that). Government's role in this is highlighted as a provider & facilitator of free trade, without any trade restrictions. Then only international trade will be globally beneficial, this is evident from WTO' s encouragement of free trade.