International economics ( trade ) Essay Example | Topics and Well Written Essays - 1750 words

International economics ( trade ) - Essay Example This is so because they believed in a static international economic relations which means one can only gain if the other losses. Adam smith was the pioneer of classical economics who for the first time explained the term absolute advantage in the context of international economics in 1776. His theory of absolute advantage is based on a notion that the country should only manufacture and specialize in the goods which it can produce with the lower cost. Adam smith was a great proponent of free trade. His views of international trade are based on labor division and international specialization. Assume that there are two countries i.e. UK and USA which are trading two goods i.e. wheat and cloth internationally. UK produces wheat by hiring 10 labors whilst US has an advantage to produce the same amount of wheat by employing 6 labors. The above statistics reveal that US has labor specialization in the production of wheat and UK specialize in the production of cloth. This situation leads to trade between US and UK for wheat and cloth respectively. According to Smith’s theory of trade US should export wheat whilst UK should export cloth if they want to gain from the trade. Portugal has absolute advantage in wine and cloth production over UK. According to the theory UK will export cloth because its absolute disadvantage is less here as compared to the production of wine. Contrarily Portugal should export wine as its absolute advantage in case of wine is greater comparatively. Before trade production of wine requires 120 labors whilst cloth’s production involves 100 labors which means production of cloth is cheaper in UK. This is so because 1 unit of wine will cost 1.2 (120/100) units of cloths. More precisely, with a labor UK can either produce 1 unit of wine or 1.2 units of cloth. The situation is reverse in Portugal as it has absolute advantage in the production of both goods. However, the production of wine is cheaper