Classical Country Based Trade Theories

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What are the Classical Country-Based Trade Theories?

This was one of the first theories of international trade. They focus on the individual country in examining patterns of imports and exports. These theories are useful in describing trade for commodities. This is because they are standardized and undifferentiated type of goods and services that focus mainly on price.

Mercantilism

This theory was developed in the sixteenth century and states that a country’s wealth is determined by the amount of gold and silver that it has. It states that a country’s goal should be to maximize these holdings by promoting exports and discouraging imports.

Export-orientated trade manufacturers favored this policy. Also, domestic manufactures that were threatened by foreign imports, used mercantilist trade policies, for example tariffs and quotas, and this protected them from foreign competition.

This benefited entities that aimed for profits such as businesses, workers and politicians, however it harmed most members of society.

- When the government gives a subsidy to a company to encourage exports, then this is paid by society in the form of higher taxes.

- Restriction of imports e.g. tariffs and quotas, are paid by consumers in the form of higher prices.

Nonetheless, it is still a favored policy by some members of societies, usually called protectionists. Furthermore, nearly every country has adopted some mercantilist policies to protect their key industries.

Absolute Advantage

However Adam Smith believes that Mercantilism’s basic problem is that it confuses the acquisition of treasure with the acquisition of wealth. He states that it actually weakens a country as it loses the advantage of trade and benefit from it. Furthermore, in the aim of minimizing imports, a country may need to produce goods that it is not suited to produce.

Instead, he believed that free trade would expand a country’s wealth, by expanding the...
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