广东省省级精品课程国 际 贸 易Chapter3: Classical International Trade Theory 第三章 古典国际贸易理论

广东外语外贸大学 何元贵 教授

What shall we do in this chapter? In this chapter, we’ll review the history,

follow the thought of Adam Smith and David Ricardo about the division of labour and foreign trade. In this way, we get to know how international trade theory occurred and developed ， how the model of international trade theory modified and developed by breaking through the theoretical limit 。

We should know: (1) What is the basis of trade? (2) What is the price of trade? (3) What are the gains from trade?

§1. Mercantilism 一、 The Building Time & Background of

Mercantilism The early study and theory of international

trade almost all came from the books of Mercantilism.

Mercantilism is a kind of popular economic philosophy during the period of western European system turning from feudalism to capitalism, definitely from 16’s to 18’s early times.

二、 Mercantilism View on Trade & Economy

1.What is wealth?– The Mercantilist answer was the stock of

precious metals possessed by a country.

2. How can precious metals be obtained?– Extraction from naturally occurring stocks

• This option is available to few countries

– Earn precious metals through exports of goods and services

• Since payment for exports is made with precious metals, exporting causes precious metals to flow into a country

• Similarly, since payment for imports is also made with precious metals, importing causes precious metals to flow out of country

3. The natural conclusion – exports must exceed imports for a country to become wealthy!

4. Can this condition hold for all countries?– No!– Therefore, the wealth of one country must

come at the expense of another country.

5. Mercantilist policy– Strict government control over economic activity to

ensure a positive trade balance

6. A further look at the Mercantilists Mercantilism was the economic philosophy

adopted by merchants and statesmen during the 16th and 17th centuries. Mercantilists believed that a nation‘s wealth came primarily from the accumulation of gold and silver. Nations without mines could obtain gold and silver only by selling more goods than they bought from abroad. Accordingly, the leaders of those nations intervened extensively in the market, imposing tariffs on foreign goods to restrict import trade, and granting subsidies to improve export prospects for domestic goods. Mercantilism represented the elevation of commercial interests to the level of national policy.

三、 Are precious metals “wealth”?

To the Mercantilists, yes. Modern measures of wealth are based on

a country’s ability to produce the goods and services that improve quality of life.– Hence, the Mercantilist conclusion is based a

definition of wealth the differs significantly from modern notions of wealth.

– This distinction leads to very different conclusions about how to become a wealthy nation.

§2. Absolute advantage ： Built on the ideas of Adam Smith

What is division of labour ？ Division of labour or specialization is the

specialization of cooperative labour in specific, circumscribed tasks and roles, intended to increase the productivity of labour. Historically the growth of a more and more complex division of labour is closely associated with the growth of total output and trade, the rise of capitalism, and of the complexity of industrialization processes.

一、 Introduction of Adam Smith

亚当 . 斯密（ 1723-1790 ） was a famous Scottish economist of 18th century. Smith was thought as the founder of the classical school of economic theory. In 1776 ， Smith published his famous masterpiece: An Inquiry into the Nature and Causes of the Wealth of Nations.

Adam Smith - Wikipedia, the free encyclopedia.files http://en.wikipedia.org/wiki/Adam_Smith

二、 Adam Smith’s free trade view

1 、 Smith paid much attention to division of labour， and thougth division of labour was the only cause leading to economic progress.

2 、 Smith thought free competition(laissez-faire) and free trade were necessary and superior.

3 、 Absolute advantage exists between nations when they differ in their ability to produce goods.

– More specifically, absolute advantage exists when one country is good at producing one item, while another country is good at producing another item.

三、 The trade model of absolute advantage

( 一 ) Assumptions 1. Two nations in the world, every country only

produce 2 items of goods; 2.Labour is the only factor of production. Every

country get a unchangable sum of labour, and their quality are same. No unemployment.

3.Labour are free to move in different areas internally, but no mobility of factors among nations.

4. Different nations apply different technology in producing , and technology stay unchanged.

5 、 All commodities are produced under constant returns to scale.

6 、 There is perfect competition in both commodities and factors markets in both nations. Prices equal to average product cost. No profit.

7 、 Carry on free trade policy.There are no tariffs,or other obstructions to the free flow of international trade.

8 、 There are no transportation and other exchange costs.

9 、 Trade is balanced between the 2 countries. No currery move abroad.

( 二 ) Trade model of absolute advantage

1.How can we know absolute advantage exists in which item of a nation?

(1) By comparing labour productivity( 劳动生产率 )(Qj / L).

Absolute advantage exists when one country can produce more one item than another country.

(2) By comparing cost of manufacture ( 生产成本 ):αLj = L / Qj

Absolute advantage exists when one country can produce one piece of a item by putting in less factor of production than another country.

2 、 An example of absolute advantage Assumptions: 2 countries:China and U.S; 2 items:cotton and wheat ; different technology, labour is the only factor of production ， both nations got 100 workers.

Production possibility of China and U.S

cotton （万米） wheat （吨）

China 100 50

US 80 100

cotton （万米） wheat （吨） China 100 50 US 80 100

Labour productivity of China and U.S

cotton wheat

China 1=100 万米 /100 人 √

0.5 =50 吨 /100 人

US 0.8 =80 万米 /100 人 1 √

Comparing result ： China is good at producing cotton, while U.S is good at producing wheat. So,they should carry on complete specialization of production.

cottonαLj = L / Qj

wheat

China 1=100 人 /100 万米 √

2 =100 人 /50 吨

US 1.25 1     √

Cost of manufacture of China and U.S

Gains from trade ： Comparison of production and consumption

before and after specialization China US Total

cotton wheat cotton wheat Cotton wheat

Before production 50 25 28 65 78 90

Exchange rate

1 ： 0.5 1 ： 1.25

consumption

50 25 28 65 78 90

after production 100 0 0 100 100 100

Exchange rate 1 ： 1

consumption

70 30 30 70 100 100

Before vs

after

+22 +10

4 、 Determinination of Price

In this example ， the exchange rate is 1:1 between Chinese cotton and Americn wheat.In real world,the rate(price) is always in changing. It’s determined by the supply and demand of the 2 items of world market.

The relative price of cotton should be between 0.5 ～ 1.25 in the condition of free trade.

四、 Value of the theory of absolute advantage

Significance： （ 1 ） It showed the law that division of labour and

specialization could make the resources more efficently used and higher labour productivity.

（ 2 ） It’s the first time that certified that both nations could benefit from division of labour and world trade,that means international trade is a win-win game but not a zero score game.By this way it partly explained the reason of foreign trade.

（ 3 ） Smith’s study took international trade theory into the theory system of market economy.

Limitation ：

Absolute advantage requires one country to be better at production of one product and another country to be better at production of another good for specialization and trade to be mutually advantageous.

Then, What if one country is better at everything?

The theory of absolute advantage only partly explained the reason of foreign trade, or, it just explained one special case.That made the theory could not be used generally.

§3. Comparative advantage ： Built on the ideas of David Ricardo

一、 Introduction of David Ricardo ( 1772-1823)

He was one of the most influential of the classical economists, the most important of his contributions was the theory of comparative advantage, a fundamental argument in favor of free trade among countries and of specialization among individuals.

David Ricardo - Wikipedia, the free encyclopedia.files

http://en.wikipedia.org/wiki/David_Ricardo

二、 Views of David Ricardo David Ricardo argued: The basis of

international trade is not only the absolute difference of labour productivity. If there are relative difference productivity of the trade partners ， then there were the relative difference of cost and price, and that made division of labour and foreign trade possible.

Ricardo argued that all nations could benefit from free trade, even if a nation was less efficient at producing all kinds of goods than its trading partners. as long as each concentrates on the activities where it has relative productivity advantage.

According to Ricardo's theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations.

三 . Trade model of comparative

advantage Assumptions:

 cotton（万米）

wheat（吨）

China 100 50

US 150 100

Production possibility of China and U.S

How can we know comparative advantage exists in which item of a nation?

Usually by 3 ways ： relative labour productivity relative cost of manufacture opportunity cost

1、  By comparing relative labour productivity.

The relative labour productivity of China and U.S

cotton /wheat wheat/cotton

China 2= 1/0.5 √ 0.5= 0.5/1

US 1.5= 1.5/1 0.67 √

2 、 By comparing relative cost of manufacture.

Relative cost of manufacture of China and U.S

cotton wheat

China 0.5=1/2 √ 2=2/1

US 0.67= 0.67/1 1.5=1/ 0.67 √

3 、 By comparing opportunity cost. opportunity cost : The amount of another item must be given up in order to release sufficient resources to produce one more unit of a given item.

Opportunity cost of China and U.S

cotton wheat

China 0.5 2

US 0.67 1.5

四、 Value of the theory of comparative dvantage The model of comparative advantage is

simple, but it’s propbally the most wonderful part of economics.

It gave the concept of reletive cost, formed the basis of modern trade theory,developed the theory of absolute advantage,supplied the theoretical basis for free trade.

Like Adam Smith, Ricardo was also an opponent of protectionism for national economies, especially for agriculture.

Limitation ：

1 、 Too much Assumptions ， especilly the fixed opportunity cost made the model different from the reality.

2 、 It’s static analysis .

Review: C3. Classical International Trade Theory

第一节 重商主义的贸易观点 第二节 亚当 .斯密的绝对优势贸易理论 一、亚当 .斯密简介 二、亚当 .斯密的自由贸易思想及观点 三、绝对优势贸易理论模型 四、绝对优势贸易理论的先进性与局限性 第三节 大卫 .李嘉图的比较优势贸易理论 一、大卫 .李嘉图简介 二、大卫 .李嘉图的贸易思想 三、比较优势贸易模型四、比较优势贸易理论评介