Chapter3 - 6015-C03.QXD 10/18/00 3:14 PM Page 53 CHAPTER 3...

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53 TOPICS TO BE COVERED International Division of Labor Labor Theory of Value Absolute Advantage Prices in International Trade Comparative Advantage Specialization in Production International Trade Equilibrium Gains from International Trade Relative Wage Determination KEY WORDS International division of labor Mercantilism Constant returns to scale Absolute advantage Comparative advantage Terms of trade Consumption possibility frontier Trade triangle Walras Law Reciprocal demand Importance of being unimportant CHAPTER 3 The Classical Model of International Trade
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54 Chapter 3 — The Classical Model of International Trade *For a more mathematical development of the classical model, see Akira Takayama, International Trade (New York: Holt, Rinehart and Winston, 1972); or Miltiades Chacholiades, International Trade Theory and Policy (New York: McGraw-Hill, 1978). W e now have all the tools necessary to develop a theory of how and why nations engage in international trade. We begin that task in this chapter by presenting the classical theory of international trade. This theory was first developed by Adam Smith in his famous book The Wealth of Nations, published in 1776. Many other economists of that and subsequent decades made important contributions to this theory. These economists include David Ricardo, Robert Tor- rens, and John Stuart Mill. Ricardo’s contributions to international trade theory have been deemed so important, in fact, that the classical theory is sometimes also referred to as Ricardian theory. Ricardo published his ideas on international trade in Chapter 7 of his book On the Principles of Political Economy, in 1819. Included in this chapter is a discussion of the concept of comparative advantage, the principle that most economists believe determines fundamental trade patterns. Although Ricardo is often credited with dis- covering the law of comparative advantage, students of the history of economic thought are likely to criticize this practice, because there is substantial evidence that Robert Torrens, a less well-known English economist of the time, developed the notion of comparative advantage years earlier, in 1808. Whether Ricardo knew of Torrens’s work and borrowed this idea or whether he developed the concept separately we shall never know. The principle of comparative advantage is so important that it alone justifies our discussion of a theory first laid out over 200 years ago. There are other reasons for studying the classical theory. First, the assumptions of the model are suggestive of certain real-world situations that exist today. In particular, they help us to understand the basis for a mutually beneficial trading relationship that can occur between a developed and a developing country. Second, this theory explains how wages can be high in a country like the United States and yet American goods can still compete in world markets. Finally, it illustrates, perhaps better than any other theory, the gains from the international specialization of production.
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This note was uploaded on 04/10/2011 for the course ECON 2001-1 taught by Professor Nickeyturner during the Spring '11 term at Walden University.

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Chapter3 - 6015-C03.QXD 10/18/00 3:14 PM Page 53 CHAPTER 3...

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