The Rise Of Free Trade - 1243 Words

Introduction: Free Trade: The Rise of Free Trade: According to Adam Smith’s 1776 Wealth of Nations, which other economic historians like, McCulLoch (1825) , Blaugh (1978) and Heckscher (1994), have replicated, Mercantilism was a dominant economic theory prevalent across Europe throughout the 17th to the 18th century with limited empirical evidence (Benjamin Hav Mitra-Kahn, 2011). The theoretical contrasts between researchers throughout the mercantilist age originate from the difference in how researchers and policymakers defined the economy. According to Smith, the principal reasons of mercantilist policies were â€Å"to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible†¦show more content†¦Using this, Smith established a formative contribution to commercial policy theory and concluded that even though the protection of domestic industries does increase the overall employment and output, it does not imply it is beneficial. A proper understanding of the determinants of calculating real income was required to the access the true effect of trade restrictions. He stated that individuals deploy their resources in support of the industry that would bring in the maximum revenue for them. Smith made this the backbone of his economic framework; profitability leads to fulfilling of the needs and wants of the society, in turn leading to increasing the national income to its maximum capacity. Thus, for this reason and following human rights to give individuals the liberty to do what they seek, the competitive market was the best tool for profit maximization and optimum allocation of resources (DA Irwin, 1996). Smith believed that the government did not have any direct role in dictating terms for market processes, nonetheless, the administration was fundamental for supporting the market systems as a social foundation for the market to work more viably. Smith then went on to talk about opportunity costs and his perception of this concept. He believed that at any given time in an economy, the resources (capital and labor) are fixed and in order to increase the output of one sector the output of another sector had to be sacrificed. This could be done only by