Classical Approach to International Trade Theory

Instructor: Kyle Aken

Kyle is a journalist and marketer that has taught writing to a number of different children and adults after graduating from college with a degree in Journalism. He has a passion for not just the written word, but for finding the universal truths of the world.

This lesson explores and analyzes the history, importance, relevance, and uses of classic international trade theories. This includes a look at country-based theories like mercantilism, absolute advantage, comparative advantage, and Heckscher-Ohlin Theory or Factor Proportions Theory.

International Trade Theory - Classic Trade Theories

The classic approach to international trade theory is very different from modern theories. The historical theories of the classic approach are from the perspective of a country, which means they are country-based. Around the middle of the twentieth century, the theories began to shift towards the firm-based views of modern theories. This lesson will look at the history, importance, relevance and uses of classical international trade theories.

Mercantilism

Back in the sixteenth century, the theory of mercantilism was the first economic theory to be developed. The theory used the amount of gold and silver a country had to determine its wealth. Mercantilists believed that a country could increase the amount of wealth it had by promoting exports and discouraging imports. One example of mercantilism is the rise of protectionist policies after the great depression, as many countries reduced the value of their currency and reduced imports.

Absolute Advantage

Adam Smith offered people a new trade theory in the late 1700s, called absolute advantage, which looked at a country's ability to produce a good more efficiently than another country. Smith argued that trade should not be restricted or regulated by the government. In fact, trade between countries should happen naturally according to the market forces. His theory of absolute advantage reasoned that if a country could increase efficiencies, both countries would benefit and trade would be encouraged.

Comparative Advantage

The theory of comparative advantage was introduced by David Ricardo in 1817 to address the shortfalls in Smith's theory of absolute advantage. Ricardo noticed that there are countries that have an absolute advantage in many areas, where other countries have no advantages. However, Ricardo pointed out that even if one country has an absolute advantage over another country in production of both products, both countries can still specialize and trade can happen. The theory of comparative advantage focuses on the relative productivity differences, not absolute productivity.

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