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Unformatted text preview: on the variations in exchange rates. Classical Theories of International Trade. The classical theories of international trade1 were suggested by Adam Smith, David Ricardo, J.S. Mill. The basic assumptions of the classical theories are: 2 x 2 x 1 model (implying two countries, two products and single factor of production). Perfect competition in both output and input markets. Homogenous labor Mobility of labor internally and immobility internationally Constant returns to scale Free trade No transportation costs Labor theory of value Full employment of factors of production. J.S. Mill has restated the Ricardian theory in terms of comparative advantage or comparative effectiveness of labor in order to examine the question of international value (i.e. the ratios at which goods would exchange for one another). Ricardo has taken the given output of each commodity in terms of differing labor costs. Mill on the other hand has...
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