International Trade Is An Old Subject - 2086 Words

International trade is an old subject, but it continues to increase its relevance thanks to the intensification of links between countries. In fact, they are now more than ever interconnected through trade in goods and services, through cash flows and investments. These phenomena increase pervasively due to the growing trend toward globalization. Therefore, many theories, which highlight the gains from trade, were created and then developed and some of them are useful to explain the current international trade. The first developers, who laid the foundation for further and more recent theories about the importance of trade between nations, were classical economists: Adam Smith and David Ricardo. According to Salvatore (2012), Smith†¦show more content†¦According to his theory, â€Å"even if one nation is less efficient than the other nation in the production of both commodities, there is still a basis for mutual beneficial trade† (Salvatore, 2012, p.35). A country may be more efficient in the production of both goods, but it will still have a comparative advantage in the production of a single good, the one that uses resources in the most efficient way compared to alternative production (ibid). The mistake made by Ricardo was that his model revolved around the labour theory of value, which states that the relative prices of commodities are proportional to the amount of work incorporated into them (Bellino, 2012). This assumption is not reflected in real life, thus, the law of comparative advantage was redrafted by Haberler (Salvatore, 2012) in terms of opportunity cost. Accordingly, a country has a comparative advantage in the production of a good whether the opportunity cost of its production is lower than in the other country (Salvatore, 2012). This last notion is defined as the units of a good that a country has to give up in order to produce one additional unit of the other good (ibid). This concept is also called marginal rate of transformation, which is explained by the absolute value of the slope of the production possibility frontier (PPF) (ibid). In fact, this frontier symbolises the maximum amount of a commodity that can be supplied once it is decided the extent of the