Edited by John Linarelli
Chapter 10: International trade theory and comparative advantage
International trade is one of the oldest and most visible forms of globalization. It reached an unprecedented scale and complexity between the last quarter of the 19th century and the outbreak of the First World War. Despite the periodic fluctuations in trade and output to which the world economy has been subject, such as the Great Depression of the interwar period and the worldwide recession from which it is (in 2010–13) recovering, trade grew even more after the middle of the 20th century. This chapter aims to elucidate why trade takes place among countries, the nature of comparative advantage, and the reasons why some countries acquire a comparative advantage in certain commodities. The rationale for trade will be highlighted through the contributions that economists have made ever since David Ricardo first formulated the concept of comparative advantage in 1817. Despite the vicissitudes through which this concept evolved over the past two centuries, it is foundational for understanding why nations export and import particular goods and services, and why the commodity composition of trade tends to change, sometimes dramatically, over time. Well before modern nation-states made their appearance on the world stage, different regions around the globe traded with each other on the basis of their geographic or climatic advantages, factor endowments and commodity needs. It was natural for philosophers, tradesmen and even theologians to speculate on the causes and advantages of the international exchange of goods and services.
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