Adam Smith with the invisible hand.

Part 1(1 page)

(Essay) Adam Smith wrote about the “invisible hand’ and was in favor of free trade. Michael Porter wrote about national competitive advantage.

Discuss how these 2 theories are related.  State and explain your stance on free trade based upon your understanding and agreement/disagreement with these 2 theorists.

 

Part 2 (respond to the two other students opinions. What do you think about their posting? Do you agree with the response? If yes why and if no why.

There is response 2 and 3 and each response should be 5-7 sentences

 

 

  1. (Response)
  2. (Response) The theory, invisible hand which was in favor of the free trade is closely related to national competitive advantage. Both theories emphasize on maximization of profit and minimization of the inputs required through innovation. Smith states in his theory that if consumers were given the freedom to purchase what they wanted and the producers sold what they wanted, the prices and distribution of various products would be to the benefit of the community at large. This leads to minimization of the input during production and maximization of profits. In order to maximize revenue, the prices of goods should be low and affordable to the consumers. This then calls for the investors to efficiently reduce the capital needed in production and also maximize the returns made by the companies they invest in (Smith, 1759).

Michael E Porter on the other hand explained that the prosperity of the nation is not based by the endowments or the natural resources available in the country as thought. It is also not the labor pool neither the interests that determine prosperity of the nation. Porter indicates that through innovation of the companies and the capacity to upgrade according to the trends in the market, competitiveness is gained. It is through this acquiring of competitiveness that the companies that they become better than their competitors. To gain global competitiveness, knowledge is required in terms of sustainable values and diversity in culture and institutional structures (Porter, 1990).

When the buyers and sellers are allowed to buy and sell goods which they feel comfortable with, innovation is promoted especially in production. The decentralization nature gives the freedom to set prices in the market. Free market is of great importance both locally and internationally especially through investments. However, there are drawbacks associated with free market for example the failure in market economy as well as dangers related to profit motive. The drawbacks are caused by lack of government intervention in the free market.

 

  1. (Response) COLLAPSE

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Invisible Hand
we know that Adam Smith was the father of economics he is related to the theory of invisible hand. He popularized on this law in his book Wealth of Nation. It is written in 1776. According to him, the undesirable market force is demand and supply that helps in a free market to reach equilibrium automatically.
He observes that an economy will comparatively work and function well if the government leaves people alone. He accepts that people are trade freely, that means self-interest traders in the market would compete with each other leading to market as positive input by employ the invisible hand. Free trade means there is no government regulations. If no government regulation traders charge less of the commodity and consumers buy more.
National competitive advantage
we know that the theory of national competitive advantage is developed by Michael Porter in his book, the competitive advantage of nations. Here he explains that how the competitive nations enter in to the competitive international market. He suggests that a nation competitiveness is depends upon the capacity of industries to innovate and upgrade. The companies get advantage in world market because they have pressure and challenges.
Advantages of free trade

  1. There will be comparative cost advantage between the trading nations.
    2. More factor earnings.
    3. Import is cheaply
    4.reduced competition
    5. Market is enlarged
    6. Restricted exploitation of natural resources

Disadvantages

  1. The free trade is better for technologically advanced countries, less developed countries earn nothing.
    2. Unfair and unhealthy competition between domestic and foreign companies
    3. Leads to unfavorable balance of payments
    4. It reduced the self sufficiency of the countries

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