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. [...]
[...] But Ricardo maintained that the Malthusian situation could be offset by the value of land for agriculture fluctuating with respect to its supply and demand conditions. When agricultural land becomes scarce and its value increases, more people will be attracted to that profession; efficiency in agriculture would lead to greater crop yields, corresponding to the demand for foodstuffs, thereby preventing the Malthusian famine situation[1]. Ricardo considered foreign economies as extensions of the domestic economy, so that foreign commerce could be treated from a perspective similar to domestic commerce. [...]
[...] Guilds and other forms of unions that protected their members' status and the qualities of their trades were limiting both economic expansion and growth. Instead, he argued for private and free enterprise in which individuals take the risks and reap the profits or bear the losses, as the case may be. While Smith considered agriculture to be of prime importance, he nevertheless deflated its physiocratic significance and placed it soundly within the economic function of feeding the populace. Surplus agricultural produce could most certainly be exported and goods and services not provided by the domestic economy imported. [...]
[...] David Ricardo was certainly one of the pillars of economics on which Mill and other great economists have stood to expand their vision. Ricardo's approach to economics differed significantly from that of Adam Smith. Ricardo only introduced the theories from which he made conclusions described in the previous parts of the paper. His most imperative assumption was that economic growth must decline and end due to the scarcity of land and its falling marginal productivity. Meanwhile, Adam Smith's theory argues that foreign trade vents surplus products is necessary to maintain or generate a full utilization of a country's resources. [...]
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