THE BASIS OF INTERNATIONAL TRADE
The fundamental basis of international trade lies in the fact that countries are endowed by nature with different elements of productive power. In other words. factor endowments are unevenly distributed among the countries of the world. This is due to geographic facts. physical features and climatic differences. Some countries have the monopoly of certain minerals. e.g.• Bengal Andand Bangladesh for jute. Thus. international trade is inevitable when there are marked differences in the countries regarding materials. natural vegetation. climate. soils and other physical and geographical conditions. International trade is also affected by several other factors besides the natural or geographical factors.e.g.• stage of economic development. accumulation of capital by a nation and its foreign investments. technological progre trade and financial regulations. political’ affiliations. and soon.
CLASSICAL THEORY OF INTERNATIONAL TRADE
Let us briefly review the hi torical background of the theory of international trade propounded .mainly by Adam Smith and Ricardo, the principal exponents of the classical school of economics. The economic philosophy that prevailed during the 17th and 18th centuries was that of Mercantilism.The main feature of the mercantilist doctrine was that a country could grow rich and prosperous by acquiring more and still more precious metals.
especially gold. and. therefore. all the efforts of the State should be directed to such economic activities as help a country to acquire more and more precious metals. According to the mercantilist school of economists. if international trade is not properly regulated then people might exchange gold for commodities of daily use or required for a luxurious living to the depletion of the stock of precious metals with the nation. Thus. exports were viewed favourably so long as they brought in gold but imports were looked at with apprehension as depriving the country of its true source of riche i.e., preciou metals. Adam Smith and Ricardo strongly repudiated the mercantile nations of international trade.
THE THEORY OF ABSOLUTE ADVANTAGE
Adam Smith argued that a country could certainly gain by trading with other nations. Just as a tailor does not make his own shoes but exchange a suit for shoes, and hence both the tailor and the shoemaker gain by trading. in the same manner. Smith argued that a country as a whole would gain by having trade relations with other countries. According to Smith. if one country has absolute advantage over another in one line of product on. and the other country has an absolute advantage over the first country in another line of production. then both countries would gain by trading. For example. if it takes 10 umts of labour to produce one unit of good X in country A. but 20 units of labour to produce the same good in country B, and if it take 20 units of labour to produce one unit of good Y in country Band 10 units of labour to produce the same good in country A. then both the countries will gain by trading. After the opening of trade, country A will specialise in the production of good X, while country B will specialise in the production .
Comparative Cost Trade Theory of international Trade, By David Ricardo.
David Ricardo. the British classical economist known for his originals theories in economics. come out with the theory of comparative cost, which was a unique theory at that time Adam Smith’s absolute cost theory had its own limitation. Ricardo developed absolute cost into a comparative cost trade theory.Admn Smith Adam Smith gave the following example to explain his theory, which is based on traditional labour theory of value.