2. The Origins of International Trade Theory

For centuries prior to the late eighteenth century, trade was driven by the concept of mercantilism, whereby countries gain specie (precious metals) through exports, and essentially lose by importing, and a net positive balance of trade was sought by all. Adam Smith introduced the notion of absolute advantage, whereby countries could gain by specializing in the goods they produced less expensively than the rest of the world and trading openly. David Ricardo’s concept of comparative advantage took this idea one step further: countries needn’t be the cheapest producer, only the most efficient with respect to the opportunity cost to produce their goods. Ricardo showed that between two trading countries, each will always by mathematical identity have a comparative advantage in something. Ricardo’s restricting assumptions are detailed; these will be relaxed in later chapters.