International Trade Theories

The Theories of international trade can be listed as follows:

Theory of Absolute Differences in Cost - Adam Smith

When one nation is more efficient than another in the production of one commodity but is less efficient than the other nation in producing a second commodity, then both nations can gain by each specializing in the production of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage. This process helps in utilizing the resources in the most efficient way and the output of both products will rise. Such an increase in the output measures the gains from specialization in production available to be shared between the two nations through trade

Theory of Comparative Cost - David Ricardo

Absolute cost advantage theory can explain only a very small part of world trade such as trade between tropical zone and temperate zone or between developed countries and developing countries. Most of the world trade is between developed countries that are similar with respect to their resources and development which is not explained by absolute cost advantage. The basis for such trade can be explained by the law of comparative advantage.

Theory of Opportunity Cost in International Trade - Haberler

According to the opportunity cost theory, the cost of the commodity is the amount of the second commodity that must be given up to release just enough resources to produce one additional unit of the first commodity. The opportunity costs can be expressed by the exchange ratio between the two commodities.

Theory or Modern Theory of International Trade - Heckscher-Ohlin

He criticized classical theory of international trade and he was discounted with comparative cost theory. He also accepts that the comparative cost difference is the basis for international trade. Therefore he tried to explain the reason of comparative cost difference through his theory known as ?General Equilibrium theory. It is otherwise known as ?Modern theory of International Trade.