Chapter 3 — The Classical Model of International Trade
*For a more mathematical development of the classical model, see Akira Takayama,
(New York: Holt, Rinehart and Winston, 1972); or Miltiades Chacholiades,
International Trade Theory
(New York: McGraw-Hill, 1978).
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,
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
Ricardo published his ideas on international trade in Chapter 7 of his book
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.