Which Statements Reflect The Purpose Of Trade Agreements

The classical Western business model was based on the economic realities of the 18th century. The factors of production were relatively fixed: the land was immobile (although its fertility or use may change) and labour mobility was severely constrained by political constraints. For most of the century, cross-border capital movements have been constrained by political barriers and lack of knowledge in other markets. (However, by the middle of the 19th century, capital and labour were freer between Europe and America. The technology in the 18th century was relatively simple by current standards and was relatively similar in all countries. In addition, production of most products was exposed to declining yields at that time, which meant that with the increase in production, the production costs of each additional unit increased. In the 17th and 18th centuries, the prevailing thought was that a prosperous nation should export more than it imports, and that the trade surplus should be used to extend the nation`s treasure, first gold and silver. This would allow the country to have a larger and more powerful army and navy and more colonies. Smith and Ricardo considered only work as a „factor of production.” In the early 1900s, this theory was developed by two Swedish economists, Bertil Heckscher and Eli Ohlin, who took into account several factors of production. [4] The so-called Heckscher-Ohlin theory basically states that a country will export products produced by the factor it has in relative abundance and that it will import products whose factors of production require factors of production where it is relatively less abundant.

This situation is often presented in economic manuals as a simplified model of two countries (England and Portugal) and two products (textile and wine). In this simplified presentation, England has relatively abundant capital and Portugal has relatively abundant labour, and the textile is relatively capital-intensive, while wine is labour-intensive. Under these conditions, the two nations would be better off if they acted freely and, in such a situation of free trade, England would export textiles and import wine. This would maximize efficiency, which would lead to total production of textiles and wine and to lower prices for consumers than would be the case in the absence of trade. Through empirical studies and mathematical models, economists believe almost everywhere that this model is also good for many products and countries. Geza Feketukuty, the leading U.S. negotiator for services in the Uruguay Round, gives a wonderful anecdote about the early efforts to start negotiations on trade in services: „The Swiss delegate . . . trade in services by pointing out how impossible it was for him to have his hair cut in another country by a hairdresser.


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