Why Counties Trade
(the classical model of international trade)
Chapter Organization
• Introduction • Trade Based on Absolute Advantage • Trade Based on Comparative Advantage • Trade Based on Opportunity Costs • The Production Possibilities Frontier and Constant
Costs • The Terms of Trade • Trade Under Increasing Opportunity Costs • Dynamic Gains from Trade
Introduction
• In this chapter, we first discuss international trade based on Adam Smith’s theory of absolute advantage. Then, we explain the pattern of trade and the gains from trade based on David Richard's theory of comparative advantage. We also explain the theory of comparative advantage in terms of opportunity cost. Finally, we describe the gains from trade that are difficult to quantify and occur over time.