The world has a long, rich history of international trade among nations. Most international trade dates from the prevailing age of mercantilism. However, objecting mercantilism is the common idea of trade philosophies proposed by Adam Smith and David Ricardo. Both of them advocated free international trade. The rule of the zero-of-sum game was the core of mercantilism. One country increased the wealth must cause another one decreased from trade. Only one could be beneficial. They thought exports could bring inflows of wealth from and imports could lead outflows of wealth to other countries.
It was this thought that each country encouraged exports and restricted imports. 1? The Classical Trade Theory (1) Theory of Adam Smith: Absolute Advantage Adam Smith set himself against the mercantilism. He advocated free trade and proposed the absolute advantage theory. In his theory, each country had its own advantage for producing goods which other country did not possess. It was this that stimulated countries to participate in the international trade by exerting the absolute advantage to obtain more benefits. Adam Smith made two assumptions: First, trade only existed between two countries.
Second, each country produced only two products, one product must have absolute advantage, and the other product must have absolute disadvantage. Therefore, each country should concentrate on producing the product with absolute advantage, and then trade the absolute disadvantage product to the other country with the absolute advantage product. After trading, the disengaged, surplus resources and products of each country could be used completely reasonable. Thus, both countries can be beneficial from the trade, not just one. This pulled down the rule of zero-of-sum game and created the rule of n-of-sum game.
Adam Smith’s absolute advantage theory successfully promoted the international trade. However, this theory did not deal with the problem that for both two products, one country had absolute advantages and the other country had absolute disadvantages. (2) Theory of David Ricardo: Comparative Advantage Fortunately, another famous economist David Ricardo succeeded and developed Adam Smith’s theory. Just like Adam Smith, David Ricardo also was an opponent of protectionism for national economies. He created his comparative advantage theory.
The theory dealt with the problem that could not be dealt using Adam Smith’s theory. The economic motives and causes international trade. According to Ricardo’s theory, even if a country has no absolute advantage in any product, the disadvantaged country can still be beneficial from specializing in and exporting the product for which it has the lowest opportunity cost of production. Though the two theories were proposed hundreds of years, they still play important influences on international trade. Each trading country can improve productivity and the world economic is promoted.
The two theories will contribute to world prosperity in the future. 2? The Modern Trade Theory Comparative advantage based on opportunity cost forms the basis of modern trade theory. The theory shows that after comparing, when the country decides to produce its advantage product, it needs to give up the other product that can come forth during the period. The benefit form the product it gives up is its opportunity cost. Here I take a simple example to illustrate this theory. The land for planting rice or cotton, the output of rice is 500 kilogram or 100 kilogram of cotton.
If we choose to plant rice, the 100 kilogram of cotton we give up is our opportunity cost. Today, the practice of trade among nations is growing by leaps and bounds. There is hardly a person on earth who has not been influenced in some way by the growing trade among nations. The theories stimulate trade between developed and developing countries that avoid the autarky. International trade increases trading countries’ wealth and world output. That is because with trade, the resources are allocated rationally, job opportunity increase, products quality and variety increase and so on.