Question

Why did classical economists consider trade as the ‘engine of growth’? What is the counter-view projected to this? Discuss

Answer 1

Classical economists considered trade as the engine of growth because international trade played a key role in enhancing the economic development of a nation. According to them, a company will benefit by producing and exporting those goods that it can produce at a low cost. Similarly, it would be more feasible to import those goods that incurs a lot of expenditure when produced in the home country.

However, trade cannot continue to serve as the engine of growth in the present world because there are various substitutes available in the receiving countries for the primary commodities that are considered as the prime exports for the sending countries.

Answer 2

Classical economists like Adam Smith and David Ricardo gave importance to the role of trade in economic development. They were in favour of free trade based on comparative advantage.

According to the principle of comparative advantage each country will gain if it specializes in the production and export of the goods which it can produce at a relatively low cost. On the other hand, each country will gain if it imports the goods that it produces at a relatively high cost.

They advocated the doctrine of laissez-faire or non-interference by the government in both domestic and international trade. According to them completely free trade would promote the maximization of welfare for all the countries in the world trading system.

A counter view to this was put forth by a British economist John Maynard Keynes. The Keynesian economic theory is based on the concept that active government intervention is necessary for the growth and stability of an economy.