World Trade Organization and regional organizations

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Which trade theory is likely to be applied more frequently in the global market of the 21st century?

The theory of comparative advantage is likely to be applied more frequently in the global markets today. This is because it explains why it can be beneficial for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other.
While international trade has been present throughout much of history, its economic, social, and political importance have been on the rise in recent centuries, mainly because of industrialization, advanced transportation, globalization, multinational corporations, and outsourcing.

WHY DO COUNTRIES TRADE WITH EACH OTHER?

- To obtain goods that they cannot produce themselves
- To increase choice for their consumers
- To obtains goods at a cheaper price than what they can produce themselves
- To make more revenues and profits. It an extra place in which to sell their goods
- Countries specialise in the production of goods and services at which they are better.
- To exploit a comparative or absolute advantage.

They are linked together by:

1. Exchange of goods and services
This happens because each country has its own comparative advantage. What matters is not the absolute cost of production, but rather the ratio between how easily the two countries can produce different kinds of things.
Take the example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less work than it takes in England. However, the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore, while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. And conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at closer to the cost of cloth.

2. Impact of WTO

The World Trade Organization was created to open up markets, and promote international trade based on the laissez faire 'Free Trade' paradigm. The WTO creates and monitors agreements to reduce trade barriers, and arbitrates in disputes over foreign market access, and violations of these agreements. This has created global ...