Cuaresma, Janelle Marie S.

BSA 3

Mercantilism
Theory: Mercantilism, prevailing from the 16 th to 18th centuries, emphasized the
accumulation of wealth through a positive balance of trade. Nations aimed to export more
than import to amass precious metals like gold and silver.

Key Ideas: Policies such as tariffs, subsidies, and colonization were promoted to secure
economic advantage. Governments sought to protect domestic industries and maintain a
favorable trade balance.

Notable Proponents: While mercantilism wasn’t attributed to a single figure, key proponents
include Jean-Baptiste Colbert in France and Thomas Mun in England.

Absolute Advantage (Adam Smith)

Theory: Adam Smith, in his seminal work “The Wealth of Nations” (1776), introduced the
concept of absolute advantage. He argued that nations should specialize in producing goods
where they have a natural efficiency advantage.

Key Ideas: Smith advocated for free markets, minimal government intervention, and the idea
that a nation benefits from focusing on its strengths in production.

Notable Proponent: Adam Smith, the Scottish economist and philosopher, is considered the
architect of the absolute advantage theory.

Comparative Advantage (David Ricardo)

Theory: David Ricardo, in “Principles of Political Economy and Taxation” (1817), built on
Smith’s ideas with the theory of comparative advantage. He posited that even if one country
is more efficient in producing all goods, trade is still beneficial based on relative efficiencies.

Key Ideas: Ricardo’s theory introduced the notion of opportunity cost and demonstrated that
specialization and trade can benefit all nations involved.

Notable Proponent: David Ricardo, the British economist, is credited with formulating the
comparative advantage theory.
 Heckscher-Ohlin Model
Theory: Developed by Eli Heckscher and Bertil Ohlin in the early 20 th century, this model
argues that countries will export goods that intensively use their abundant factors of
production and import goods that use their scarce factors.

Key Ideas: The model focuses on the role of factor endowments (capital, labor) in shaping
trade patterns, emphasizing comparative factor advantages.

Notable Proponents: Eli Heckscher and Bertil Ohlin, Swedish economists, jointly
contributed to the formulation of this model.

New Trade Theory (Paul Krugman)

Theory: Paul Krugman, in the late 20th century, introduced the New Trade Theory. It
emphasizes economies of scale, product differentiation, and the role of imperfect
competition in international trade.

Key Ideas: Krugman’s theory integrates insights from industrial organization and
international economics, explaining why some industries thrive despite small markets.

Notable Proponent: Paul Krugman, the American economist and Nobel laureate, is
associated with the development of this theory.

Porter’s Diamond Model (Michael Porter)

Theory: Michael Porter, in the late 20th century, proposed the Diamond Model to assess a
country’s competitiveness in certain industries. It considers factors like factor conditions,
demand conditions, related and supporting industries, and firm strategy.

Key Ideas: Porter’s model extends beyond traditional economic factors, incorporating
aspects of industrial organization and business strategy.

Notable Proponent: Michael Porter, the American academic and economist, is credited with
formulating the Diamond Model.

These international trade theories provide a comprehensive framework for understanding

the motivations and dynamics behind global trade, each offering unique insights into the
complexities of international economic relations.