Classical theories of International Trade
International Trade Theory What is international trade? Exchange of raw materials and manufactured goods (and services) across national borders Classical trade theories: explain national economy conditions--country advantages--that enable such exchange to happen New trade theories: explain links among natural country advantages, government action, and industry characteristics that enable such exchange to happen Implications for International Business Classical Trade Theories Mercantilism (pre-16th century) Takes an us-versus-them view of trade Other country’s gain is our country’s loss Free Trade theories Absolute Advantage (Adam Smith, 1776) Comparative Advantage (David Ricardo, 1817) Specialization of production and free flow of goods benefit all trading partners’ economies Free Trade refined Factor-proportions (Heckscher-Ohlin, 1919) International product life cycle (Ray Vernon, 1966)