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Free «Theories of International Trade» Essay Sample

The Wealth of Nations by Adam Smith

The basic idea behind the wealth of Nations was the emphasis on the free market. The free market was where the market was left to naturally run governed by economic dynamics without the interference of the government. In chapter one smith addresses the aspect of division of labor which he explains that leads to efficiency in the "productive powers of labor" Smith goes on to emphasize that division of labor is applicable in almost any field because it encourages innovation and invention. Perhaps this is one of the greatest achievements of Smith in economics. This is because division of labor is emphasized by virtually all economic systems regardless of the political inclination. Division of labor is used in all other fields apart from just economics and that is why even in during education and training people are trained to be specialist in a particular area so that in the end of the day the contributions of each individual can eventually lead to overall development of a nation. Division of labor as Smith explains is limited to the diversity of a particular market because if the market is small there will be no enough room and wages to cater for the many individuals and in this perspective division of labor will not be beneficial. However the diversity and the size of the market in the contemporary world definitely need division of labor.

However the issue of free market is not infinitely applicable in the contemporary society. 200 years ago when Smith wrote the Wealth of Nations international trade was not well established therefore the currently observed complexities of international trade were not at play. The diversity and complexity in markets have generated various interests and concerns for various nations especially when it comes to protecting local businessmen from the ills of international trade. Smith explains that the market should be free and even if it may sometimes seem chaotic it is controlled by an 'invisible hand', however of whose interest is the invisible hand working operating upon? The invisible hand favors the producer who can produce goods at a very cheap price and subsequently sell them cheaply in the market. Therefore the concern of the producer who is unable to produce goods cheaply due to various other factors is at a disadvantage. It is at this point that government involvement is required to implement economical tools such as quotas and subsidies in order to ensure that local producers are still competitive in the market.

On the principal of commercial Smith explains the relevance of money as a medium of exchange and as measure of value. Smith outlines that it (money) can be used to "obtain whatever else we have occasion for, than by means of any other commodity" by this he outlines the advantages of using money as a medium of exchange due to the various properties money adorns.

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This contribution is currently applicable because the universal medium of exchange is money and even if it occurs in several currencies, it is possible to convert from one currency to another.


Smith explains that money is an efficient medium of exchange due to the factor that unlike moveable goods which depreciate over time, money should be stable over time. This property of money is relevant in the contemporary world where various economies strive so hard to keep their currencies stable against other currencies. The fact that was also overlooked by Smith in this aspect is how a particular currency would perform in the international perspective. Although money is still used as the medium of exchange internationally the fact that it sometimes fluctuates in the international market makes it sometimes not very reliable.


Wage-Labor and Capital, Value, Price and profit, by Karl Marx

 Karl Marx had a more political approach an explained the contribution of the economic tools used by political to bring disparities between various groups of people therefore leading to the emergence of classes. Marx explains that, "we have been reproached for neglecting to portray the economic conditions which form the material basis of the present struggle between classes and nations" (Pg 14). Marx is very much right when he provides an in depth explanation of what is meant by wages. Marx explains that wages is the amount of money given as payment for work done during a certain period or certain amount of work. The explanation provided by Marx explains the real situation existing between an employer and the laborer. Marx explains that wages like any other commodity has a price which means that when one gives a certain amount of money he should therefore obtain a commodity whose value is equal to the money according to the market. Marx goes on further to explain that when one does a particular job for instance of sewing clothes, the employer will pay him the money even before the cloth is sold. The cloth may be sold at a loss or the employer might sell it at a very high price and therefore rake high profits.

Therefore if labor is actually a commodity that can be bought, then it should receive the same amount of value as the income generated by the employer. In most instances employers deny employees the true wage of their labor because if they were selling the products at a loss then they would not be in business any more. The capitalist system therefore dictates that one can buy a commodity including labor at a lower price and later sell it at a very high price making huge profits at the expense of the laborer.

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However the aspect of Marx's argument that is not applicable in the contemporary society is the aspect the aspect of value exchange when it comes to labor. Marx explains that if capitalism was really a free market then the laborer and the capitalist should meet in the market and let the dynamics of the market take control. However 120 years ago the market was not as free as it is today because negotiations on issues concerning the amount of wages to be paid for a particular labor as unknown due to various political and social factors at play. In the contemporary society workers are more sensitized about their rights and are able to express their concerns through various avenues including trade unions. In the developed countries where the market is more free laborers even negotiate the pay with their employers.

From the analysis of the two philosophers it is clear that the economic theories they came up with was as a result of brilliant observation of the economic and political situations in their times. Some aspects of the theories are applicable and some are not due to economic and political developments in the contemporary society.

Foreign Labor at the Lindsey Oil Refinery

On February 2009 BBC reported that hundreds of workers had staged what was termed as "unofficial walkouts." The walkouts were as a result of the use of foreign staff at the Lincolnshire refinery. International trade was born out of division of labor when it became apparent that no single nation could produce all the goods it required and supply all the services it needed. Smith's concept was based on the idea that when a market is diverse there arises for a need for people to specialize in order to optimize production and increase on the quality of the goods produced. In the case of Lindsay oil refinery the world is the market and indeed it s very diverse and therefore each nation cannot produce all goods it needs and all services it requires. Smith explains that the market is controlled by an invisible hand which he outlines that favors the person who is able to produce goods cheaply and subsequently sell them cheaply but at a higher price and subsequently making profit. The major outcry by union leaders is that jobs were being granted to foreigners and yet there were many people in England who were jobless. Division of labor as outlined earlier favors the person who can produce goods cheaply. Companies every in the world always look into ways to increase profits while reducing costs. In most instances where foreign labor is involved it is always apparent that companies prefer foreign labor because it is relatively cheaper.

The most probable reason for the refinery to resort to foreign labor could be that it was cheap. Therefore the company realized that it would be better to employ foreigners at a lower price for the same job as compared to local laborers and this would have the effect of lowering costs. It is for this reason that even when the management claimed that it was giving only specialized jobs to foreigners, foreigners were still found doing jobs such as welding and pipe fitting which could have as well be done by local laborers. Another probable situation is that there were no specialists in England who could perform the specialized jobs. Division of labor as explained by Smith requires specialization. Over time division of labor has ensured that specialization if optimized due to the growing market and the stiff competition present.

As explained by Karl Marx wage and labor should be the actual compensation of the work done. Labor unions were borne out of the need to create a platform from which laborers could argue and negotiate their cases to employers. In the current contemporary world the market is full of many players and competition has become stiff, as a result some employers are more often tempted to lower the cost of production by lowering the wages granted to laborers. The sad fact is that although wages are lowered the working hours remain the same or sometimes even increased. The greatest resource for any economy is the human resource and this fact is always agreed upon unanimously among contemporary economists.

Most companies prefer foreign laborers to local ones for many reasons. For instance in most instances foreign laborers are not aware of their rights or are too desperate to even care. Take the situation that was at play during slave trade eras. Various farms in the Americas and Europe were seeking the services of slave laborers from as far as Africa, not because the same job could not be done by locals but because foreign labor was relatively cheaper and could therefore help them to maximize their profits while minimizing cost of production. Local laborers in England are very conversant of their rights due to the labor organizations. The cause of the refinery disagreement was that a contract was awarded to an Italian based firm instead of being awarded to a Britain firm. As explained earlier, one of the main weaknesses of the theory of the wealth of nations was that it overlooked or was ignorant to the current economic dynamics at play. Smith argues that the market place should not be controlled whatsoever not even by the state because it is already being controlled by the invisible hand, which translates to the forces of supply and demand. The market in the contemporary world is characterized by stiff competition which is some instances may be unfair. It is at this point that government intervention is required.

Foreign trade requires regulations by governments in order to protect local business people and laborers from stiff and unfair competition sometimes presented by international trade.

As explained by Brown: "where there are jobs in this country, we need people with the skills, developed in this country". Brown is for the idea that UK residents should be given the first priority for jobs in UK and the government should strive to ensure that they have the necessary skills required. For instance it could be a possibility that foreign workers offer cheap labor and work for long hours. It is therefore the responsibility to protect local laborers through regulation such as establishing minimum working hours.


Looking at the national prosperity of UK it is apparent that such a move will lead to prosperity. This is because foreigners will want to spend and invest their wages in their home economies. Furthermore with many UK residents still jobless the local purchasing power will be lowered. One might argue that foreigners reduce the production costs of companies because they probably request for lower wages. However looking and weighing at the pros and cons it is apparent that the strike might bring into attention of the government some unfair activities conducted by companies. It is also apparent that the oil refinery with the continued walkouts might lose significant amount of revenue but this cannot be compared to the money the UK economy will lose if people are jobless and money generated within UK is invested in other countries.


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