International Economics
Chapter 3: Why everybody trades?
When people, firms, or countries trade, they buy, sell, or exchange goods or
services between themselves.
In the late 18th and early 19th centuries, first Adam Smith and then David
Ricardo explored the basis for international trade as part of their efforts to make a case
for free trade.
Adam Smith’s Theory of Absolute Advantage
According to Adam Smith, the basis of international trade was an absolute cost
advantage. Trade between two countries would be mutually beneficial when one
country produces a commodity at an absolute cost advantage over the other country
which in turn produces another commodity at an absolute cost advantage over the first
country.
The absolute cost advantage theory can be illustrated with the help of the
