Essay about International Trade Theory

4039 Words 17 Pages
The theory of international trade:
1. Mercantilism Theory.
2. Absolute Advantage Theory.
3. Comparative Advantage Theory.
4. Heckscher-Ohlin's Theory
5. Porter’s Diamond of Competitive Advantage Theory.

Mercantilism
The first theory of international trade ,mercantilism, engaged in England in the Mid 16th century holding that a countries wealth is measured by its holdings of treasure which usually means its gold & silver. The principal assertion of mercantilism was that gold and silver were the mainstays of national wealth and essential to vigorous commerce. At that time gold & silver were the currency of trade between countries,a country could earn gold & silver by exploiting goods. Conversely, importing goods from
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Important Criticism of Mercantilism Theory
Firstly,The Mercatilism viewed trade as a zero sum game,in which a gain by one country results in a loss by another country. It was left to Adam Smith and David Recardo to show the shortsightedness of this approach and to demonstrate that trade is positive sum game or a situationin which all countries can benefit.
Secondly,The classical economist david home pointed out an inherent inconsistency in trhe bmarcantilist doctrine in 1752. According to hume, if England had a balance of trade surplus with francethe resulting inflow of gold and silver would swell the domestic money supply and bgenerate inflation in England. In france, however the outfiow of gold and silver would have the opposite effect. France’s money supply would contract, and its prices would fall. The change in relative prices between france and England would encourage the frence to buy fewer English goods and the English to buy more frence goods. The result would be deterioration in the English balance of trade and an improvement in frence balance trade, until the English surplus was eliminated. Hence, according to hume, in the long run no country could sustain a surplus on the balance of trade and so accumulate gold and silver as the mercantilist had envisaged.

Smith’s Theory of Absolute Advantage
Adam Smith in his book

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