Students from other groups are most welcome to attend my class«only as an audience . Please check your portal and contact administration to know which Group you belong please go to your own groups of IB classes«otherwise you will be considered absent in your own group classes 5. ADD/DROP period is over«. Punching and signing in the attendance registrar provided by the lecturer is compulsory in each class 3.Class notice: 1. Less than 80% of attendance will result in disqualification from attending the final exam 4.

putting an end to the mercantilist era .CLASSICAL INTERNATIONAL TRADE THEORIES y y y y y The expansion of international trade during the Early Classical period in 500 BC was contributed by the rise of civilization The development of international trade theories began in the 15th century These theories attempt to explain why certain goods are traded across national borders The first theory. Adam Smith proposed the absolute advantage theory. which examines the role of society in international trade. is known as the mercantilism theory In 1776.

3 Development of classical trade theories . David Ricardo came up with the comparative advantage theory y Other theories were later introduced such as the Heckscher-Ohlin theory in the early 1900s y Figure 6.) In 1817.Classical International Trade Theories (cont.

MERCANTILISM Figure 6.4 Features of mercantilism .

the wealth of a nation was best described by the amount of gold it had y Britain. used international trade to achieve this by exporting more than it imported to accumulate gold y This approach successfully helped them to maintain a positive balance of trade. which did not own mines at that time. or trade surplus .MERCANTILISM (cont.) i) Trade Surplus The prime instrument used by mercantilists y A nation is supposed to gain more bullion by exporting more than it imports to accumulate wealth y In the 1600s.

) ii) Government Intervention y Mercantilists proposed that the intervention of the ruling government was necessary in order to achieve trade surplus y In the mercantilism era.MERCANTILISM (cont. the government of a mercantilist nation was supposed to play the role of protectionist to defend the nation·s market from international trade y There was provision whatsoever to expand the volume of a nation·s trade because the main focus of mercantilism is to increase trade surplus .

where the European economy was experiencing transition The emergence of globalization and international trade has been stimulated by the imperial-colony relationship International trade was powered by technological improvements in the shipping industry and urbanization of rural areas End consumers have to pay more when such a policy is enforced y y y .MERCANTILISM (cont.) iii) Colonization y The height of mercantilism occurred during the emergence of the nationstate.

not government interventions The principle a nation will benefit from trade with another nation when it is able to produce a good at the lowest absolute cost In other words.e. the demand and supply of the market. the nation is said to have an absolute advantage when the output per unit of input produced is higher than another nation with which it has a trade relationship y y . should determine the direction.Absolute Advantage y Championed by the Scottish economist Adam Smith in his book ¶The Inquiry into the Nature and Causes of the Wealth of Nations· in 1776 His strong argument was that market forces. volume. i. and composition of international trade.

) y The theory clearly encouraged each country to specialize in the production of a specific product in which it has an absolute advantage.Absolute Advantage (cont. through the method of allocating resources on more productive goods Figure 6.5 Features of the absolute advantage theory .

) y The basis of Smith·s arguments A nation should not produce goods that it can buy from other nations at cheaper prices Such countries will benefit from specializing in the production of goods in which it has an absolute advantage y This theory opposes the mercantilism view of trade as a zero-sum game and instead proposes that international trade is eventually a positive-sum game which benefits all participants A country should never produce goods locally if it can buy the goods at a lower price from other countries .Absolute Advantage (cont.

this theory suggests that countries should specialize in the goods they can produce most efficiently.Comparative Advantage y y y Shows how countries can gain from trading with each other. firm. rather than trying for self-sufficiency . or individual is most efficient at doing Proposed by David Ricardo. even if one of them is more efficient and has an absolute advantage This theory is about identifying which activities a country.

Comparative Advantage (cont. in which a country that participates in trade could realize economic gains by reaping benefits from specializing in what it is best at producing and trading with other nations y Refers to the ability of a country to produce a particular product at a lower opportunity cost than another country y .) Views trade as a positive-sum game.

6 Features of comparative advantage y Underlying basis: The ability of a country to produce a product most efficiently.) Figure 6.Comparative Advantage (cont. given all the other products that could be produced .

Group assignment # 2 ‡Formation of Ten member groups ‡Research on WTO in internet as well as books. ‡Write about ´The Positive & Negative arguments about WTOµ ‡Maximum 1000 words ‡Will be graded in 10 point score & will carry 5% in total marks and ‡Submission date: 8th February ¶ 2010 Thank you & have a great day !!! .

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