International Trade Theory

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International Trade Theory

1.         The global view on trade has changed considerably in relation to the dynamic shifts between Adam Smith’s mercantilism and David Ricardo’s notion of comparative advantage. In essence, the theory of mercantilism advocated for a relationship that existed between the wealth of a state and the quantity of silver or gold holdings it possessed. Based on this, the theory’s main idea was that a state could boost or increase its gold holdings by facilitating exports and depressing the level of imports. Hence, the aim of each state involved attaining a trade surplus or averting from a trade deficit. In this respect, Smith’s theory asserted evidence of a zero sum game via the notion of absolute advantage. Nonetheless, the shortcomings of the respective conjecture were scrutinized in David Ricardo’s comparative advantage. For Ricardo, comparative advantage occurs in the event that a state fails to manufacture a commodity more efficiently in comparison to another country. Despite this, the said state has the capability of producing better and effectively when based on other goods.

2.         The improvements that Herchur and Olan made were based on the shortcomings that Ricardo’s idea of comparative advantage failed to address. Foremost, the scarcity of resources was not explored in the premise. For Ricardo, each state possessed a consistent state of development based on the resources they held. However, this premise is counteracted since different states possess disparate conditions of development. Secondly, the criticism against Ricardo’s theory was based on the implications of endowment, specifically on the allocation of income. Accordingly, the theory failed to establish the correlation between trade and aspects of endowment as well as the impact of such dimensions on the deviations in income.