Trade Theories

Trade Theories

Absolute cost advantage

The theory of absolute cost advantages, developed by Adam Smith in 1776 in his book An Inquiry into the Nature And Cause of the Wealth of Nations (abridged German title: The Wealth of Nations), is the basic building block of classical trade theory and stands in contrast to the strategies of mercantilism, in which a country can only be achieved at the expense of another advantages.

Smith's theory states that each state should specialize in the production of goods which he can produce cheaper than other states. This should then be exchanged for needed goods abroad. That form of foreign trade and the international division of labor brings advantages to all countries, so that they do ultimately receive more goods than in the self-sufficiency and connected to both trading partners to greater prosperity (Klug et.al, 2006).

Comparative advantage trade theory

The model of comparative advantage is one of the basic concepts underlying the theory of international trade and shows that countries tend to specialize in the production and export of manufactured goods that relatively lower cost compared to the rest of the world, the comparatively more efficient than others and tend to import goods in which are ineffective and therefore produced with comparatively higher costs than the rest of the world.

This theory was developed by David Ricardo in the early nineteenth century, and its basic premise is that, if a country has no absolute advantage in the production of any good, i.e. manufactures all its products even more expensive than in the rest of world, you will want to specialize in those goods for which it is comparatively greater advantage or disadvantage comparatively minor. This theory is a theory about the evolution of Adam Smith. For Ricardo, the decisive factor in international trade would not be the absolute costs ...