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What do you consider to be the major differences between Adam Smith’s and David Ricardo’s theories of international trade?

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  1. Introduction.
  2. This principle as an advance on that of absolute advantage.
  3. Major input of Ricardo.
  4. Ricardo's theory.
  5. Comparative costs.
  6. Mercantilism.
  7. Conclusion.
  8. Bibliography.

The basic concept underlying all international transactions is that foreign markets are extensions of domestic markets, in the sense that goods and services produced domestically, and whose quality is reflected in the strengths of the supply and demand curves, can also be sold internationally. This market-extension concept allows for the developing of markets in different countries, regardless of the domestic market conditions. Traditionally, the significance for foreign trade is that it provides an outlet for a country's goods and services, so that employment is maintained and profits continue to increase. For this reason, classical and neoclassical economists emphasized the comparative advantage of trade, and the basis for establishing trade among partners whose advantage in production of different goods and services warranted the international exchanges. The key theorists who have introduced the notion of international trade were Adam Smith and David Ricardo. The foundations of their theories and major difference of viewpoints are the subject of this paper. Ricardo's view on international trade was based on the concept of comparative advantage. This principle is an advance on that of absolute advantage in the sense that a country suffering absolute disadvantage in the production of every commodity could still gain from trade.

[...] Smith's theory of international trade was based on the concept of the division of labor that widened the market and gave vent to the resources which, in the absence of trade, would remain unemployed or underemployed. International trade, by overcoming the narrowness of the domestic market, ensures that the division of labor is carried to the highest perfection. This in turn increases the productive powers of a nation and augments its annual produce to the utmost. Ever since David Ricardo couched his explanation of trade in static terms, the valuable insights of Smith regarding growth and international trade and their link with increasing returns became almost forgotten. [...]

[...] Comparative costs were important in international trade as the costs of goods imported declined and then rose over time with respect to domestic goods. The "invisible hand" of Adam Smith and Say's Law were prevalent in Ricardo's theory, and this, indeed, was another expression of Hume's Law. However, Ricardo's consideration of foreign markets within the same theoretical context as domestic markets was invalid, in spite of the significant contribution he made to economic theory. This could be attributed to the fact that when he wrote, the Industrial Revolution had not developed to the extent that it had during John Stuart Mill's time, so that tariffs and banking systems had not developed to the extent that they had during Mill's time. [...]

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