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CLASSICAL INTERNATIONAL
TRADE THEORIES
à The expansion of international trade during the Early
Classical period in 500 BC was contributed by the rise
of civilization
à The development of international trade theories began
in the 15th century
à These theories attempt to explain why certain goods
are traded across national borders
à The first theory, which examines the role of society in
international trade, is known as the mercantilism theory
à In 1776, Adam Smith proposed the absolute advantage
theory, putting an end to the mercantilist era
Classical International Trade
Theories (cont.)
à In 1817, David Ricardo came up with the
comparative advantage theory
à Other theories were later introduced such
as the Heckscher-Ohlin theory in the early
1900s

è 
- 
Development of classical trade theories

MERCANTILISM

è 
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èeatures of mercantilism

MERCANTILISM (cont.)

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/ 
, 
à The prime instrument used by mercantilists
à A nation is supposed to gain more bullion by exporting
more than it imports to accumulate wealth
à In the 1600s, the wealth of a nation was best described
by the amount of gold it had
 Britain, which did not own mines at that time, used international
trade to achieve this by exporting more than it imported to
accumulate gold
à This approach successfully helped them to maintain a
positive balance of trade, or trade surplus
MERCANTILISM (cont.)

.
 
) 

à Mercantilists proposed that the intervention of the
ruling government was necessary in order to achieve
trade surplus
à In the mercantilism era, the government of a
mercantilist nation was supposed to play the role of
protectionist to defend the nation·s market from
international trade
à There was provision whatsoever to expand the
volume of a nation·s trade because the main focus of
mercantilism is to increase trade surplus
MERCANTILISM (cont.)

.
01
à The height of mercantilism occurred during the
emergence of the nationstate, where the European
economy was experiencing transition
à The emergence of globalization and international trade
has been stimulated by the imperial-colony relationship
à International trade was powered by technological
improvements in the shipping industry and urbanization of
rural areas
à End consumers have to pay more when such a policy is
enforced
Absolute Advantage

à Championed by the Scottish economist Adam Smith in his

book ¶The Inquiry into the Nature and Causes of the Wealth
of Nations· in 1776
à His strong argument was that market forces, i.e. the demand
and supply of the market, should determine the direction,
volume, and composition of international trade, not
government interventions
à The principle
 a nation will benefit from trade with another nation when it is able
to produce a good at the lowest absolute cost
 In other words, the nation is said to have an absolute advantage
when the output per unit of input produced is higher than another
nation with which it has a trade relationship
Absolute Advantage (cont.)

à The theory clearly encouraged each country to specialize in

the production of a specific product in which it has an absolute
advantage, through the method of allocating resources on more
productive goods

è 
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èeatures of the absolute advantage theory

Absolute Advantage (cont.)
à The basis of Smith·s arguments
 A nation should not produce goods that it can buy from other
nations at cheaper prices
 Such countries will benefit from specializing in the production
of goods in which it has an absolute advantage
à This theory opposes the mercantilism view
of trade as a zero-sum game and instead
proposes that international trade is
eventually a positive-sum game which
benefits all participants
 A country should never produce goods locally if it can buy the
goods at a lower price from other countries
Comparative Advantage

à Shows how countries can gain from trading with

each other, even if one of them is more efficient
and has an absolute advantage
à This theory is about identifying which activities a
country, firm, or individual is most efficient at
doing
à Proposed by David Ricardo, this theory suggests
that countries should specialize in the goods they
can produce most efficiently, rather than trying
for self-sufficiency
Comparative Advantage (cont.)

à Views trade as a positive-sum game, in

which a country that participates in trade
could realize economic gains by reaping
benefits from specializing in what it is best
at producing and trading with other nations
à Refers to the ability of a country to
produce a particular product at a lower
opportunity cost than another country
Comparative Advantage (cont.)

è 
- -
èeatures of comparative advantage

à Underlying basis:
 The ability of a country to produce a product most efficiently,
given all the other products that could be produced
  

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