Name: Mark Anthony T.

Conda

Professor: Ramirez Cesar

Course: BSA12M1

Date: JULY 2 ,2021

REACTION PAPER ON INTERNATIONAL

TRADE THEORIES AND POLICIES

The significance of Adam Smith’s international trade theory on modern economic

theory and policy

Importance of international trade

According to Smith, a country that engages in international trade gains a lot. It

can exchange their surplus with something else that may satisfy the needs and wants of

its people. The size of the local market is not a hindrance for division of labour because a

country may produce more than its home consumption knowing their products have an

international market. There will be maximum production, which increases the revenue

and wealth of the society .

Adam Smith’s statement “gives a value to their superfluities” has been

reconstructed by contemporary economists as “vent-for-surplus” to overcome the

controversy surrounding its meaning. As nations participate in international trade, their

overproduction can be traded to obtain what is demanded by its people .Thus, it can

satisfy its population’s needs and wants. However, these surplus is not separate from

other international market concepts. Recently, division of labour and specialization has
made countries to produce what they do not consume domestically but must export to

other countries.

International trade is characterized by the increased competition for imported

products. Competition is not, in itself, a negative thing. In fact, it is beneficial because it

decreases the chances for domestic monopolies. While producers may oppose

international competition, Smith shows that it benefits the public .

International trade facilitates the exchange of knowledge and technology

between different countries. Adoption of these new technologies can improve the

productivity and thus stimulate economic development. The benefits of international

trade are felt more by nations that access a wider market. For example, China, which

has a large domestic market already, may benefit more by accessing technologies in

Europe. Such technologies will widen its market. Smith never mentions the limitations

for division of labour and specialization. Hence, it is assumed that it is boundless (Davis

2005, 146). The size of the market is not limited in international trade because it is

dependent on division of labour. More division of labour will widen the market.

According to Smith’s theory, it is more beneficial to trade with developed nations

because they have more mature economy, developed market and advanced division of

labour. For example, a country like Britain can benefit from free trade with France than

Portugal. France takes more Britain than Portugal, thus the value of the exchange is

higher in many ways that encourage industrial development and more sub-division of

labour .Thus, international trade is not equally beneficial to all countries. When a

country trades with a more developed country, their differences may be amplified

because of wealth differences. Smith’s comparison of the trade between a developed

and developing nation is important in modern economic jurisprudence. Many

developing nations have enacted protective laws that govern international trade. Smith

shows that such protectionism hurts the developed country more .

Contemporary theories of absolute advantage

Economists who came after Adam Smith did not pay much attention to his theory

of international trade. They see it just as a bedrock for subsequent theories of

international trade .Adam Smith’s theory was a stepping stone to the theory of

comparative advantage associated with David Ricardo. Others include Hechscher-Ohlin

model and factor price equalization theory.

The theory of comparative advantage is the most praised theory in modern

economics. It is represented by a 2 by 2 matrix used to compare two countries selling

two commodities. One country can produce one product at a cheaper labour cost than

the other and sell more cheaply. Thus, each country has an absolute advantage over the

other in production of one good.

A major limitation with the absolute advantage theory is its inability to explain

complex relationship in world trade .Both theories are complementary. Smith ought to

have come up with a more advanced theory of comparative advantage. The comparative

advantage theory, however, fell short of Smith’s theory in claiming that trade can only

be beneficial when it leads to an increase in the amount of products produced with the

existing technology. It only compares to inflexible situation before and after the opening

of exchange. Also, the theory does not include the gains of technological changes and
economic growth. It, therefore, lacks the depth of the original theory advanced by

Smith. This example represents the distortion that may arise from reconstruction of first

ideas.

Smith’s theory is adjusted to fit into the language of contemporary economics.

This adjustment characterized most of the neoclassical paradigms that examines

concepts on marginal analysis. Ricardo built on Smith’s absolute advantage theory to

come up with the comparative advantage theory which is regarded as the modern trade

theory.

Conclusion

This work use a doxographical approach to investigate the significance of Adam

Smith’s international trade theory for modern economic theorists and policy makers. It

compares how Smiths theory is represented in contemporary economic thoughts. It

finds that the work of Adam Smith has been adulterated and inaccurately represented.

This alteration ignores many important dimensions of Smith’s economics. Many

neoclassic theorists have been quick to dismiss Smith’s theory arguing that it is

established neither a static model nor a neoclassical model. His representation as

modern textbooks as proponent of the theory of absolute advantage is misleading.

This work shows that it is not uncommon for misleading reconstructions towards

scientific attribution. Smith is not the mistaken recipient of undue recognition. Rather,

Adam Smith’s theory of absolute advantage is a great misrepresentation of his original

Smith’s original ideas. Understanding these differences can have serious economic and

policy implications in modern world. The modern economic models have attached great
importance to Smith’s original ideas. The new trade theories are focusing on economies

of scale, increasing returns, technological changes, and other productivity measures.

Contemporary theories recognize that specialization plays an important role in both

domestic and international trade. Others include economies of scale, technology and

learning that are regarded as supplements to Smith’s theory comparative advantage.