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Theory Of International Trade | Criticism


Various theories have been presented by various economists in different times i.e.

(1)marcantiles theory of trade.

(2)classical theory of trade(Adam smith,ricardo.)

Various theories have been presented by various economists in different times i.e.

(1)marcantiles theory of trade.

(2)classical theory of trade(Adam smith,ricardo.)

(3)general equilibrium model of international trade.

(4)hickscher-ohlin theory of trade.

(5)extension in h-o theory.

Why these theories of international trade are presented.it is because of the reason to know.

(1)what is pattern,size and volume of the word.

(2)the gain from trade is possible.

Marcantalists Theory Of International Trade

this theory was presented by marcantalist in 17th and 18th centuries.they were highly nationalists.they were not in favor of controlled trade.they were of the view,that if it is favorable it inflow of gold and precious metals;than outflow of gold and precious metals.so trade should be made (favorable trade balance)they were also of the view that trade should not be given the hand of people. if it is so it is just waste of gold and precious metals.the people will import lilan from luba.(which is waste of gold.)


David Hume in 1752 wrote his book political discourses" in which he criticized.


he says it is not possible that each time a country would have a favorable balance trade.it is explained as;

In presence of surplus (R>P), the MS !, p !.

so X ! and the surplus in trade will be washed out. but,

In presence of deficit (P>R) the MS ! , p !

so X ! and the deficit in trade in will be washed out.

so he says surplus and deficit is self distinct and advocate free trade.

Classical Theory Of Trade


Labor Theory Of Value:

The classical economists assume that labor is the only factor of production and in the closed economy the prices of all goods are determined by their labor contents. Further assume prefect competition and homogeneity of factors in different sectors of the economy.

Static Model:

It is 2x2 model.i.e. Trade of only two goods between two countries.

No transportation cost transportation cast are assumed to be fixed and has no impact on international trade.

Constant Return To Scale:

It is assumed that instant return to scale prevail in two countries.

Factors Mobility:

The classical economists assume that factors of production are completely mobile, but it is not so abroad.

Adam Smith's Theory Of Absolute Advantage

Adam smith is one of the biggest supporter of free trade on the basis of international specialization and division of labor. He explains his theory

The tailor does not make his own shoes, he exchanges for shoes, there by both the shoe maker and tailor would gain. In the some way each country specializes in the product which it can produce for both than other, trade will be beneficial for the both countries. Professor Adam smith says it a country can supply us a goo cheaper than we ourselves make it, better buy it from them .thus the essence of smith's saying is this that a country would produce and specialize in the produce which it can produce chapter.

This concept can be explained with the help of example ;

6 lab
10 lab
10 lab
6 lab

to produce one and wheat in USA 6 labors are required while to produce the same unit of wheat in UK 10 labors unit of cloth USA uses 10 labors while UK uses 6 labors.

All this shows that USA has absolute advantage in the production of wheat while UK has absolute advantage in the production of cloth. so USA will specialize in wheat production and USA will be beneficial. When they specialize them the question is what will be the term of trade? smith did not give any idea about it.

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