Adam Smiths and David Ricardos Theories of International Trade

There were two types of manufacturers. one who were export oriented and others who were domesticated with their products. Export oriented manufacturers favored the mercantilist approach and believed in subsidies, tax rebates etc. to increase their sales to foreign countries. But the domestic manufacturers foresee threats to their produces and wanted tariff quotas and stringent policies to restrict the trade. This mercantilist theory was before Adam Smith’s.
Then came the theory of absolute advantage. according to Adam Smith countries should export goods in which they have an absolute advantage and import other goods from countries that have an absolute advantage in producing them i.e. goods in which they are more productive. Adam Smith’s criticism of the Mercantilists approach was that it confused the accumulation of treasure with the accumulation of wealth. The gold and silver that the country holds is not the wealth of the country. A wealth of a country according to him is measured by the wealth that the nationals of the country hold. And thus use the term absolute advantage to compare the productivity of people with other people, firms with other firms or between nations.
The contemporary of Adam Smith was David Ricardo, who gave the concept of comparative advantage. according to Ricardo if there is no difference in productivity then there is no absolute advantage and hence no trade will take place amongst countries.
There are some subtle and slight differences among the absolute and comparative advantage theories, but it is important to take into account the differences.&nbsp.Firstly, as the term absolute and the comparative in the name themselves suggests that Adam Smith’s theory takes absolute measures of productivity to compare and David Ricardo’s relative measures to compare the productivity amongst the nations.&nbsp.If absolute productivity is same then the trade should not occur according to Adam but Ricardo suggests that it is important to look at the relative productivity. Adam Smith’s trade theory does not incorporate any differences that might arise from the different use of technology or probably the difference in the combination of labor. David Ricardo’s model has an inherent assumption and a more practical approach that tells that countries differ in their usage of production technologies such that obviously, one country will be more productive in use of its resources than the other. And therefore if both the countries specialize in their production areas then output for both the countries can increase. This increase in output would be because of enhanced productivity even when no more inputs are put into the production process. Then countries can contract between themselves and trade goods that are their speciality i.e. import products in which other country specializes and export in which it has its specialization. Then both countries can benefit from one another.&nbsp.Adam Smith’s absolute advantage theory of international trade does not take into consideration that some countries may also simply lack the absolute advantage because they may not have the technology that provides them with an edge over another country and cannot, therefore, compete with other companies in the global market and benefit from any free trade economy.

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